As filed with the Securities and Exchange Commission on June 27, 1997
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. 24 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 (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, 1997 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 29, 1997.
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 Information "Financial Highlights";"How
does the Fund Measure
Performance?"
4. General Description of "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report 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 the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May
Offered I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Useful Terms
and Definitions"; "What If I
Have Questions About My
Account?"; "Who Manages the
Fund?"
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 Information "Financial Highlights";"How
does the Fund Measure
Performance?"
4. General Description of "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report 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 the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and
Definitions"; "What If I Have
Questions About My Account?";
"Who Manages the Fund?"
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 Michigan 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 Information "Financial Highlights";"How
does the Fund Measure
Performance?"
4. General Description of "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report 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 the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and
Definitions"; "What If I Have
Questions About My Account?";
"Who Manages the Fund?"
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 Information "Financial Highlights";"How
does the Fund Measure
Performance?"
4. General Description of "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report 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 the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and
Definitions"; "What If I Have
Questions About My Account?";
"Who Manages the Fund?"
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 See "Expense Summary" in the
History Prospectus
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Buy
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the
Securities Trust Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered Fund Shares 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 See "Expense Summary" in the
History Prospectus
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Buy
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the
Securities Trust Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered Fund Shares 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 Arizona Tax-Free Income Fund,
Franklin Colorado Tax-Free Income Fund,
Franklin Connecticut Tax-Free Income Fund,
Franklin Indiana Tax-Free Income Fund,
Franklin Michigan Tax-Free Income Fund,
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 See "Expense Summary" in the
History Prospectus
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Buy
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the
Securities Trust Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered Fund Shares 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 See "Expense Summary" in the
History Prospectus
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Buy
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the
Securities Trust Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered Fund Shares 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, 1997
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
INVESTMENT STRATEGY
TAX-FREE INCOME
THIS PROSPECTUS DESCRIBES THE SEVEN SERIES OF THE FRANKLIN TAX-FREE TRUST (THE
"TRUST") LISTED ABOVE. EACH SERIES MAY INDIVIDUALLY OR TOGETHER BE REFERRED TO
AS THE "FUND(S)". THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE FUND. PLEASE KEEP IT FOR FUTURE REFERENCE.
THE FUND HAS A STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JULY 1,
1997, WHICH MAY BE AMENDED FROM TIME TO TIME. IT 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 ITS ADDRESS.
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, JURISDICTION OR COUNTRY 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.
FRANKLIN
TAX-FREE
TRUST
JULY 1, 1997
- ------------------------------------------------------------------------------
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH
CAPITAL LETTERS. 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? ...............17
Who Manages the Fund? ..............................18
How does the Fund Measure Performance? .............21
How Taxation Affects the Fund and its
Shareholders ......................................22
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? ..............................34
What Distributions Might I Receive from
the Fund? .........................................37
Transaction Procedures and Special
Requirements ......................................38
Services to Help You Manage Your Account............42
What If I Have Questions About My Account?..........45
GLOSSARY
Useful Terms and Definitions........................45
APPENDIX
State Risk Factors .................................47
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 28, 1997. The Fund's actual expenses may vary.
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
- ------------------------------------------------------------------------------
FUND FUND FUND FUND FUND FUND FUND
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge
(as a percentage
of Offering Price)
4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at time of purchase++
4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at Redemption+++
NONE NONE NONE NONE NONE NONE NONE
- ------------------------------------------------------------------------------
EXCHANGE FEE
(PER TRANSACTION) NONE NONE $5.00* NONE NONE NONE NONE
- ------------------------------------------------------------------------------
CLASS II
Maximum Sales Charge
(as a percentage of
Offering Price) - - 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of
purchase++++ - - 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at
redemption+++ - - 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange Fee
(per transaction) - - $5.00* NONE NONE NONE NONE
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management Fees 0.63%** 0.63%**0.46% 0.53% 0.47% 0.50% 0.49%
Rule 12b-1
Fees*** 0.10% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08%
Other Expenses 0.13% 0.08% 0.06% 0.07% 0.07% 0.08% 0.07%
Total Fund
Operating
Expenses 0.86%** 0.80%**0.60% 0.68% 0.62% 0.66% 0.64%
CLASS II
Management Fees - - 0.46% 0.53% 0.47% 0.50% 0.49%
Rule 12b-1 Fees*** - - 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses - - 0.06% 0.07% 0.07% 0.08% 0.06%
Total Fund Operating
Expenses - - 1.17% 1.25% 1.19% 1.23% 1.20%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------
CLASS I
1 Year**** $ 51 $ 50 $ 48 $ 49 $ 49 $ 49 $ 49
3 Years $ 69 $ 67 $ 61 $ 63 $ 62 $ 63 $ 62
5 Years $ 88 $ 85 $ 75 $ 79 $ 76 $ 78 $ 77
10 Years $144 $137 $114 $124 $117 $121 $119
CLASS II
1 Year - - $ 32 $ 33 $ 32 $ 32 $ 42
3 Years - - $ 47 $ 49 $ 47 $ 49 $ 57
5 Years - - $ 74 $ 78 $ 75 $ 77 $ 85
10 Years - - $151 $160 $153 $157 $162
For the same Class II investment, you would pay projected expenses of $22
(Insured Fund), $23 (Massachusetts Fund), $22 (Michigan Fund), $22 (Minnesota
Fund) and $32 (Ohio Fund) 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.
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. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+IF YOUR TRANSACTION IS PROCESSED THROUGH YOUR SECURITIES DEALER, YOU MAY BE
CHARGED A FEE BY YOUR SECURITIES DEALER FOR THIS SERVICE.
++THERE IS NO FRONT-END SALES CHARGE IF YOU INVEST $1 MILLION OR MORE IN
CLASS I SHARES.
+++A CONTINGENT DEFERRED SALES CHARGE MAY APPLY TO ANY CLASS II PURCHASE IF
YOU SELL THE SHARES WITHIN 18 MONTHS AND TO CLASS I PURCHASES OF $1 MILLION
OR MORE IF YOU SELL THE SHARES WITHIN ONE YEAR. THE CHARGE IS 1% OF THE VALUE
OF THE SHARES SOLD OR THE NET ASSET VALUE AT THE TIME OF PURCHASE, WHICHEVER
IS LESS. THE NUMBER IN THE TABLE SHOWS THE CHARGE AS A PERCENTAGE OF OFFERING
PRICE. WHILE THE PERCENTAGE IS DIFFERENT DEPENDING ON WHETHER THE CHARGE IS
SHOWN BASED ON THE NET ASSET VALUE OR THE OFFERING PRICE, THE DOLLAR AMOUNT
PAID BY YOU WOULD BE THE SAME. SEE "HOW DO I SELL SHARES? - CONTINGENT
DEFERRED SALES CHARGE" FOR DETAILS.
++++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."
*$5.00 FEE IS ONLY FOR MARKET TIMERS. WE PROCESS ALL OTHER EXCHANGES WITHOUT
A FEE.
**FOR THE PERIOD SHOWN, ADVISERS HAD AGREED IN ADVANCE TO LIMIT ITS
MANAGEMENT FEES. WITH THIS REDUCTION, MANAGEMENT FEES WERE 0.03% FOR THE
ARIZONA FUND AND 0.18% FOR THE FLORIDA FUND. TOTAL OPERATING EXPENSES WERE
0.25% FOR THE ARIZONA FUND AND 0.35% FOR THE FLORIDA FUND.
***FOR THE ARIZONA AND FLORIDA FUNDS, THESE FEES MAY NOT EXCEED 0.15%. FOR
THE REMAINING FUNDS, THESE FEES MAY NOT EXCEED 0.10% FOR CLASS I AND 0.65%
FOR CLASS II. 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.
****ASSUMES A CONTINGENT DEFERRED SALES CHARGE WILL NOT APPLY.
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 28, 1997. The Annual Report to Shareholders also
includes more information about the Fund's performance. For a free copy,
please call Fund Information.
<TABLE>
<CAPTION>
Arizona Fund
Year Ended Feb. 28 1997 1996 1995 19941
- -------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period $10.36 $ 9.80 $10.28 $10.00
Net
Investment
Income .55 .55 .55 .34
Net
Realized
& Unrealized
Gain (Loss)
on Securities .003 .565 (.485) .265
Total From
Investment Operations .553 1.115 .065 .605
Distributions From
Net Investment Income (.553) (.555) (.545) (.325)
Distributions From Capital Gains - - - -
Total Distributions (.553) (.555) (.545) (.325)
Net Asset Value at End of Period $10.36 $10.36 $ 9.80 $10.28
Total Return** 5.55% 11.64% .94% 6.04%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's) $39,693 $38,199 $20,794 $12,895
Ratio of Expenses
to Average Net Assets*** 25% .16% .10% .03%*
Ratio of Net Investment
Income to Average Net Assets 5.45% 5.51% 5.80% 4.85%*
Portfolio Turnover Rate 18.27% 4.12% 44.61% 62.88%
FLORIDA FUND
Year Ended Feb. 28 1997 1996 1995 19941
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.02 $ 9.53 $10.07 $10.00
Net Investment Income .53 .53 .52 .34
Net Realized & Unrealized
Gain (Loss) on Securities (.032) .491 (.531) .060
Total From Investment Operations .498 1.021 (.011) .400
Distributions From Net
Investment Income (.528) (.531) (.529) (.330)
Distributions From Capital Gains - - - -
Total Distributions (.528) (.531) (.529) (.330)
Net Asset Value at End of Period $ 9.99 $10.02 $ 9.53 $10.07
Total Return** 5.17% 10.95% .21% 3.97%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $77,177 $69,583 $46,847 $32,150
Ratio of Expenses to
Average Net Assets*** .35% .35% .35% -
Ratio of Net Investment Income
to Average Net Assets 5.36% 5.37% 5.61% 4.97%*
Portfolio Turnover Rate 32.23% 24.36% 43.71% 28.72%
INSURED FUND - CLASS I
Year Ended Feb. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C>
Net Asset Value
at Beginning of Period $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08 $11.12 $12.02
Net Investment Income .69 .71 .71 .73 .74 .74 .78 .78 .78 .79
Net Realized & Unrealized
Gain (Loss) on Securities (.114) .302 (.481) .020 .751 .298 .156 .204 .032 (.837)
Total From Investment
Operations .576 1.012 .229 .750 1.491 1.038 .936 .984 .812 (.047)
Distributions From Net
Investment Income (.696) (.712) (.709) (.730) (.741) (.768) (.786) (.804) (.852) (.852)
Distributions From Capital Gains - - - - - - - - -
(.001)
Total Distributions (.696) (.712) (.709) (.730) (.741) (.768) (.786) (.804) (.852) (.853)
Net Asset
Value at End of Period $12.15 $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08 $11.12
Total Return** 4.88% 8.66% 2.03% 5.93% 12.93% 9.29% 8.38% 8.81% 7.38% (.17)%
Ratios/Supplemental Data
Net Assets at End of
Period (in 000's) $1,662,087$1,705,038$1,683,234$1,802,548$1,539,186$1,130,592$850,089$711,300$551,436$316,606
Ratio of Expenses
to Average Net Assets .60% .60% .59% .52% .53% .53% .53% .54% .58% .62%
Ratio of Net Investment
Income to Average Net Assets5.68% 5.81% 6.00% 5.79% 6.22% 6.55% 6.95% 6.92% 7.01% 7.03%
Portfolio Turnover Rate 18.66% 13.52% 14.42% 6.85% 7.95% 6.35% 9.76% 11.96% 12.79% 5.65%
INSURED FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C>
Net Asset Value at
Beginning of Period $12.31 $11.98
Net Investment Income .62 .54
Net Realized
& Unrealized Gain
(Loss) on Securities (.095) .322
Total From Investment Operations .525 .862
Distributions From Net Investment Income (.625) (.532)
Distributions From Capital Gains - -
Total Distributions (.625) (.532)
Net Asset Value at End of Period $12.21 $12.31
Total Return** 4.42% 7.32%
Ratios/Supplemental Data
Net Assets at
End of Period (in 000's) $21,521 $8,152
Ratio of Expenses to Average Net Assets 1.17% 1.18%*
Ratio of Net Investment Income to
Average Net Assets 5.10% 5.21%*
Portfolio Turnover Rate 18.66% 13.52%
MASSACHUSETTS FUND - CLASS I
Year Ended Feb. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59$10.61 $11.40
Net Investment Income .63 .66 .66 .67 .69 .68 .72 .72 .71 .71
Net Realized & Unrealized
Gain (Loss) on Securities (.098) .313 (.468) .092 .685 .307 .040 .118 (.017) (.725)
Total From Investment
Operations .532 .973 .192 .762 1.375 .987 .760 .838 .693 (.015)
Distributions From Net
Investment Income (.642) (.663) (.662) (.682) (.675) (.717) (.720) (.708)(.713) (.775)
Distributions From
Capital Gains - - - - - - - - -
Total Distributions (.642) (.663) (.662) (.682) (.675) (.717) (.720) (.708)(.713) (.775)
Net Asset Value at
End of Period $11.54 $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72$10.59 $10.61
Total Return** 4.75% 8.80% 1.83% 6.39% 12.61% 9.34% 7.10% 7.82% 6.56% .07%
Ratios/Supplemental Data
Net Assets at End of Period
(in 000's) $325,065 $301,529 $288,331 $307,013$278,510 $218,336$152,622 $123,906 $109,851 $102,764
Ratio of Expenses to
Average Net Assets*** .68% .69% .67% .60% .64% .67% .70% .72% .75% .80%
Ratio of Net
Investment Income
to Average Net Assets 5.51% 5.67% 5.89% 5.69% 6.09% 6.40% 6.72% 6.65% 6.81% 6.71%
Portfolio Turnover Rate 29.22% 10.29% 16.90% 13.82% 9.65% 7.49% 11.47% 14.14%22.97% 12.50%
MASSACHUSETTS FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
Net Asset Value at
Beginning of Period $11.69 $11.36
Net Investment Income .57 .50
Net Realized &
Unrealized Gain
(Loss) on Securities (.094) .323
Total From Investment
Operations .476 .823
Distributions From
Net Investment Income (.576)3 (.493)
Distributions From
Capital Gains - -
Total Distributions (.576) (.493)
Net Asset Value
at End of Period $11.59 $11.69
Total Return** 4.22% 7.36%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's) $6,378 $2,759
Ratio of Expenses
to Average Net Assets 1.25% 1.26%*
Ratio of Net
Investment Income
to Average Net Assets 4.96% 5.06%*
Portfolio Turnover Rate 29.22% 10.29%
MICHIGAN FUND - CLASS I
Year Ended Feb. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89$10.89 $11.67
Net Investment Income .66 .68 .69 .70 .71 .71 .75 .75 .74 .75
Net Realized & Unrealized
Gain (Loss) on Securities (.089) .337 (.484) .066 .766 .254 .124 .152 .032 (.735)
Total From Investment
Operations .571 1.017 .206 .766 1.476 .964 .874 .902 .772 .015
Distributions From
Net Investment
Income (.661)4 (.687)3 (.686) (.706) (.706) (.744) (.744) (.732)(.772) (.795)
Distributions From
Capital Gains - - - - - - - - - -
Total Distributions (.661) (.687) (.686) (.706) (.706) (.744) (.744) (.732)(.772) (.795)
Net Asset Value at
End of Period $12.00 $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06$10.89 $10.89
Total Return** 4.90% 8.86% 1.87% 6.18% 13.23% 8.78% 7.93% 8.21% 7.15% .33%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's)$1,111,537$1,115,454$1,037,717$1,055,452$882,361$665,914$515,313$427,818$370,238 $291,806
Ratio of Expenses to
Average Net Assets .62% .62% .61% .54% .58% .59% .61% .63% .67% .72%
Ratio of Net Investment
Income to Average
Net Assets 5.52% 5.65% 5.87% 5.66% 6.09% 6.45% 6.72% 6.72% 6.86% 6.85%
Portfolio Turnover Rate 30.03% 9.38% 9.12% 3.21% 2.04% 10.80% 4.17% 7.93% 9.83% 10.16%
MICHIGAN FUND - CLASS II
Year Ended Feb. 28 1997 19962
- -----------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C>
Net Asset Value
at Beginning of Period $12.14 $11.77
Net Investment Income .59 .51
Net Realized
& Unrealized Gain
(Loss) on Securities (.069) .369
Total From
Investment Operations .521 .879
Distributions From
Net Investment Income (.591) (.509)
Distributions From
Capital Gains - -
Total Distributions (.591) ( .509)
Net Asset Value
at End of Period $12.07 $12.14
Total Return** 4.44% 7.58%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's) $20,162 $6,683
Ratio of Expenses
to Average Net Assets 1.19% 1.20%*
Ratio of Net
Investment Income
to Average Net Assets 4.94% 5.03%*
Portfolio Turnover Rate 30.03% 9.38%
MINNESOTA FUND - CLASS I
Year Ended Feb. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24$11.26 $12.02
Net Investment Income .65 .67 .69 .70 .73 .73 .76 .77 .76 .75
Net Realized & Unrealized
Gain (Loss) on Securities (.120) .265 (.451) (.014) .667 .275 .072 .182 .012 (.718)
Total From Investment
Operations .530 .935 .239 .686 1.397 1.005 .832 .952 .772 .032
Distributions From
Net Investment Income (.660) (.675) (.685) (.706) (.727) (.765) (.792) (.792)(.792) (.792)
Distributions From
Capital Gains - - (.004) - - - - - - -
Total Distributions (.660) (.675) (.689) (.706) (.727) (.765) (.792) (.792)(.792) (.792)
Net Asset Value
at End of Period $12.01 $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40$11.24 $11.26
Total Return** 4.54% 8.06% 2.12% 5.42% 12.23% 8.95% 7.29% 8.39% 6.90% .48%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's) $482,128 $492,139 $479,934 $499,619$445,767 $357,279$284,779 $235,058$183,867 $155,509
Ratio of Expenses
to Average Net Assets*** .66% .66% .66% .60% .63% .65% .67% .70% .75% .76%
Ratio of Net Investment
Income to Average
Net Assets 5.47% 5.58% 5.81% 5.67% 6.12% 6.43% 6.62% 6.68% 6.80% 6.68%
Portfolio Turnover Rate 14.40% 17.72% 17.59% 13.42% 5.58% 3.14% 9.12% 4.55%15.19% 19.11%
MINNESOTA FUND - CLASS II
Year Ended Feb. 28 1997 19962
- -------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance
Net Asset Value at Beginning
of Period $12.17 $11.89
Net Investment Income .59 .50
Net Realized
& Unrealized Gain
(Loss) on Securities (.123) .281
Total From Investment
Operations .467 .781
Distributions From
Net Investment Income (.587) (.501)
Distributions From
Capital Gains - -
Total Distributions (.587) (.501)
Net Asset Value
at End of Period $12.05 $12.17
Total Return** 3.98% 6.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Period (in 000's) $4,844 $1,152
Ratio of Expenses
to Average Net Assets 1.23% 1.25%*
Ratio of Net
Investment Income to
Average Net Assets 4.87% 4.94%*
Portfolio Turnover Rate 14.40% 17.72%
OHIO FUND - CLASS I
Year Ended Feb. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02$10.93 $11.69
Net Investment Income .66 .68 .69 .70 .72 .71 .75 .75 .74 .74
Net Realized & Unrealized
Gain (Loss) on Securities (.029) .327 (.499) .066 .776 .275 .172 .141 .082 (.765)
Total From Investment
Operations .631 1.007 .191 .766 1.496 .985 .922 .891 .822 (.025)
Distributions From
Net Investment Income (.661)5 (.687)3 (.691) (.706) (.706) (.765) (.762) (.741)(.732) (.732)
Distributions From
Capital Gains - - - - - - - - - (.003)
Total Distributions (.661) (.687) (.691) (.706) (.706) (.765) (.762) (.741)(.732) (.735)
Net Asset Value at
End of Period $12.19 $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17$11.02 $10.93
Total Return** 5.35% 8.66% 1.74% 6.08% 13.26% 8.86% 8.28% 8.00% 7.58% (.01)%
Ratios/Supplemental Data
Net Assets at End of Period
(in 000's) $698,360 $685,783 $652,545 $686,398$564,758 $409,044$273,119 $224,722 $203,230 $193,702
Ratio of Expenses to
Average Net Assets .64% .64% .63% .56% .59% .62% .65% .65% .71% .75%
Ratio of Net Investment
Income to Average
Net Assets 5.43% 5.58% 5.83% 5.59% 6.05% 6.36% 6.67% 6.71% 6.80% 6.80%
Portfolio Turnover Rate 14.95% 11.47% 11.76% 7.29% 2.87% 1.16% 4.44% 10.80%32.48% 15.54%
Ohio Fund - Class II
Year Ended Feb. 28 1997 19962
<S> <C> <C>
Per Share Operating Performance
Net Asset Value at
Beginning of Period $12.26 $11.90
Net Investment Income .59 .52
Net Realized & Unrealized
Gain (Loss) on Securities (.022) .351
Total From
Investment Operations (.568) .871
Distributions From
Net Investment Income (.588) (.511)
Distributions From
Capital Gains - -
Total Distributions (.588) (.511)
Net Asset Value
at End of Period $12.24 $12.26
Total Return** 4.79% 7.43%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Period (in 000's) $15,786 $6,085
Ratio of Expenses
to Average Net Assets 1.20% 1.22%*
Ratio of Net
Investment Income
to Average Net Assets 4.80% 4.99%*
Portfolio Turnover Rate 14.95% 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.
4INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$.002.
5INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$.005.
*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 AT NET ASSET VALUE.
BEFORE MAY 1, 1994, DIVIDENDS WERE REINVESTED AT THE MAXIMUM OFFERING PRICE,
AND CAPITAL GAINS AT NET ASSET VALUE, EXCEPT FOR THE ARIZONA AND FLORIDA
FUNDS. EFFECTIVE MAY 1, 1994, WITH THE IMPLEMENTATION OF THE RULE 12B-1 PLANS
FOR CLASS I SHARES, THE SALES CHARGES ON REINVESTED DIVIDENDS WERE ELIMINATED.
***FOR THE PERIODS INDICATED, ADVISERS AGREED IN ADVANCE TO LIMIT ITS
MANAGEMENT FEES AND TO MAKE CERTAIN PAYMENTS TO REDUCE EXPENSES OF THE FUNDS
LISTED BELOW. 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
ARIZONA FUND
19941 0.83%*
1995 0.96
1996 0.86
1997 0.86
FLORIDA FUND
19941 0.83%*
1995 0.88
1996 0.82
1997 0.80
MASSACHUSETTS FUND
1989 0.79%
MINNESOTA FUND
1989 0.76%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The state
specific Funds also seek 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 objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. Of course, there is no assurance that
the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The 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, including the alternative minimum tax. Each state
specific Fund also 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 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.
Each state specific Fund invests at least 65% of its total assets in
municipal securities issued by or on behalf of its respective state, and that
state's local governments, municipalities, authorities, agencies and
political subdivisions. It is possible, although not anticipated, that up to
35% of a state specific Fund's total assets could be in municipal securities
of a state, territory, or local government other than its respective state.
The Franklin Insured Tax-Free Income Fund is diversified nationally and will
not invest more than 25% of its total assets in the municipal securities of
any one state or territory.
Some states may require a fund to invest a certain amount of its assets in
securities of that state, or in securities that are otherwise tax-exempt
under the laws of that state, in order for any portion of the fund's
distributions to be exempt from the state's personal income taxes. If the
Fund's respective state requires this, the Fund will attempt to invest its
assets as required so that its distributions will be exempt from personal
income taxes for resident shareholders of that state.
The Fund also invests at least 65% of its total assets in insured municipal
securities. The insurance may be obtained either by the issuer of the
security or by the Fund. Normally the underlying rating of these securities
is one of the three highest ratings of a nationally recognized rating
service, such as Moody's, S&P or Fitch. The three highest rating categories
are Aaa, Aa and A for Moody's and AAA, AA and A for both S&P and Fitch. An
insurer may insure municipal securities that are rated below the three
highest rating categories or that are unrated if the securities otherwise
meet the insurer's quality standards.
The Fund may invest up to 35% of its total assets, without obtaining
insurance, in (i) municipal securities secured by an escrow or trust account
consisting of direct U.S. government obligations; or (ii) short-term,
tax-exempt instruments, pending investment in longer-term municipal
securities, rated in the highest rating category of Moody's, S&P or Fitch.
For a description of the various rating categories, please see "Appendices -
Description of Ratings" in the SAI.
Under normal market conditions, the Fund invests its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to
100% of its total assets in taxable obligations, including (i) commercial
paper rated at least P-1 by Moody's, A-1 by S&P, or F-1 by Fitch; (ii)
obligations issued or guaranteed by the full faith and credit of the U.S.
government; or (iii) with respect to a state specific Fund, municipal
securities of a state or local government other than its respective state.
MUNICIPAL SECURITIES. Municipal securities are obligations that pay interest
exempt from federal income tax and that are issued by or on behalf of states,
territories or possessions of the U.S., the District of Columbia, or their
political subdivisions, agencies or instrumentalities. An opinion as to the
tax-exempt status of a municipal security is generally given to the issuer by
the issuer's bond counsel when the security is issued.
Municipal securities are issued 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 Fund has no restrictions on the maturity of municipal securities in which
it may invest. The Fund attempts 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 obtaining insurance when determining the
securities it wants to buy and whether to hold securities currently in the
Fund's portfolio.
The Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic,
business, political or other change that affects one security may also affect
other securities in the same market segment, thereby potentially increasing
market risk. Examples of changes that may affect certain market segments
include proposed legislation affecting the financing of a project, shortages
or price increases of needed materials, or declining markets or needs for the
projects.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating and
variable rate obligations. The interest rates on these obligations are not
fixed, but vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in floating or variable rate demand notes
("VRDNs"). VRDNs carry a demand feature that allows the Fund to tender the
obligation back to the issuer or a third party before maturity, at par value
plus accrued interest, according to the terms of the obligation. Although it
is not a put option in the usual sense, the demand feature is sometimes known
as a "put." Frequently, VRDNs are secured by letters of credit or other
credit support arrangements. The Fund limits its purchase of floating and
variable rate obligations to those rated in the highest rating category of
Moody's, S&P or Fitch.
With respect to 75% of the total value of the Fund's assets, no more than 5%
may be in securities underlying "puts" from the same institution. The Fund
may, however, invest up to 10% of its assets in unconditional "puts", which
are 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 restrictions in this paragraph do not apply to the Arizona
and Florida Funds.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs
are widely used by state and local governments to finance the purchase of
property and function much like installment purchase agreements. COPs are
created when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities. The
property or facilities acquired are then leased to a municipality and the
lease payments are used to repay interest and principal on the obligations
issued to buy the property. After all of the lease payments have been made,
according to the terms of the lease, 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. Thus, COPs may
enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may
not be called. This period usually lasts for five to ten years. 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
these 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.
Municipal Securities Backed By Escrow or Trust Accounts. The Fund may buy,
without insurance coverage, municipal securities for which an escrow or trust
account has been established pursuant to the documents creating the
securities. The escrow or trust account must contain sufficient securities
backed by the full faith and credit of the U.S. government to secure the
payment of principal and interest on the municipal securities.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These
are trading practices where payment and delivery of the securities take place
at a future date. These transactions are subject to market fluctuations and
the risk that the value of a security at delivery may be more or less than
its 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, it will maintain cash or liquid securities, with
an aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. The Fund
will not engage in when-issued and delayed delivery transactions for
investment leverage purposes.
BORROWING. The Fund may borrow up to 5% of its total assets from banks for
temporary or emergency purposes. Although the Fund does not currently intend
to do so, the Fund may also 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's policy is not to invest more than 10% of its
net assets 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.
Each of the Fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the Fund makes an investment. The Fund
is generally not required to sell a security because of a change in
circumstances.
INSURANCE
Each insured municipal security in the Fund's portfolio is covered by either
a "New Issue Insurance Policy," a "Portfolio Insurance Policy" or a
"Secondary Insurance Policy." These policies are intended to insure that the
scheduled amount of principal and interest on a municipal security is paid
when due. The amount of principal refers to the face or par value of a
security. It is not affected by the price the Fund pays for the security or
the security's market value. The Fund will only enter into a contract to buy
an insured municipal security if there is either permanent insurance in place
or an irrevocable commitment to insure the municipal security by a qualified
municipal bond insurer.
The insurance policies are issued by any one of several qualified municipal
bond insurers, which allows Advisers to diversify among credit enhancements.
The Fund buys insured municipal securities only if they are secured by an
insurance policy issued by an insurer whose claims paying ability is rated
triple A or its equivalent by Moody's, S&P or Fitch.
While the cost of insurance to the Fund reduces the Fund's yield, one of the
goals of obtaining insurance is to seek a higher yield than would be
available if all of the securities in the Fund's portfolio were rated triple
A or its equivalent without the benefit of any insurance. THE INSURANCE DOES
NOT GUARANTEE THE MARKET VALUE OF THE MUNICIPAL SECURITY AND, EXCEPT AS
INDICATED IN THIS PROSPECTUS, HAS NO EFFECT ON THE NET ASSET VALUE OR
DIVIDENDS PAID BY THE FUND. SHARES OF THE FUND ARE NOT INSURED.
NEW ISSUE INSURANCE POLICY. A New Issue Insurance Policy, also called a
"Primary Insurance Policy", is obtained by the issuer of municipal
securities. The issuer pays all premiums on the policy in advance. The policy
continues in effect as long as the municipal securities are outstanding and
the insurer remains in business. It may not otherwise be canceled. Since the
policy remains in effect as long as the securities are outstanding, the
insurance may affect the resale value of the securities. While a New Issue
Insurance Policy may represent an element of the market value of the insured
municipal securities, the exact effect, if any, of this insurance cannot be
determined.
PORTFOLIO INSURANCE POLICY. A Portfolio Insurance Policy is obtained by the
Fund and is effective only as long as the municipal securities described in
the policy are held by the Fund and the insurer is in business and meeting
its obligations. If there is a total or partial sale by the Fund of any
municipal security or payment of any municipal security before maturity, the
policy terminates as to that municipal security and will cover only those
securities the Fund continues to hold. A Portfolio Insurance Policy may not
otherwise be canceled, unless the Fund fails to pay the premium. If a
security covered by a Portfolio Insurance Policy is pre-refunded and
irrevocably secured by a U.S. government security, the insurance will no
longer be required as to that security.
Because coverage under a Portfolio Insurance Policy ends when the Fund sells
a security from its portfolio, the insurance does not affect the resale value
of a security. Therefore, the Fund may hold any municipal security insured
under a Portfolio Insurance Policy that is 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 security and the market
value of a similar security that is not in default. While a defaulted
security is held in the Fund's portfolio, the Fund continues to pay the
insurance premium on the security 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.
Premium rates for securities covered by a Portfolio Insurance Policy may not
be changed by the insurer, regardless of the issuer's ability or willingness
to meet its obligations. Premiums are payable monthly and are adjusted for
purchases and sales of covered securities during the month. The premium on a
Portfolio Insurance Policy is a Fund expense. If the Fund fails to pay its
premium, the insurer may take action against the Fund to recover any premium
payments that are due.
SECONDARY INSURANCE POLICY. Under its agreement with the provider of the
Portfolio Insurance Policy, the Fund may at any time buy a permanent
Secondary Insurance Policy on any municipal security insured under the
Portfolio Insurance Policy, even if the security is currently in default.
When the Fund buys a Secondary Insurance Policy on a security, the coverage
and obligation of the Fund to pay monthly premiums under the Portfolio
Insurance Policy ends. The price of the Secondary Insurance Policy may not be
changed by the insurer, regardless of the security issuer's ability to meet
its debt obligations.
With a Secondary Insurance Policy, the Fund obtains insurance against
nonpayment of scheduled principal and interest for the remaining term of a
security. This insurance coverage continues in effect as long as the insured
security is outstanding and may not otherwise be canceled. Thus, the Fund has
the opportunity to sell a security in default rather than hold it in its
portfolio in order to continue, in force, the applicable Portfolio Insurance
Policy. When the Fund buys a Secondary Insurance Policy on a security, the
single premium is added to the cost basis of the security and is not
considered a Fund expense.
One of the reasons the Fund may buy a Secondary Insurance Policy is to enable
it to sell a security to a third party as a triple A rated or equivalent
insured security. In doing so, the Fund may be able to sell the security at a
market price that is higher than what it otherwise would be without the
insurance. The triple A or equivalent rating is not automatic, however, and
must specifically be requested from Moody's, S&P or Fitch for each security.
The Fund is likely to buy a Secondary Insurance Policy if, in the opinion of
Advisers, the market value or net proceeds of the sale of a security by the
Fund may exceed the current value of the security, without insurance, plus
the cost of the insurance. 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 cost of insurance, inures to the Fund in
determining the net capital gain or loss realized by the Fund upon the sale
of the security.
The Fund may buy a Secondary Insurance Policy instead 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 objectives and policies.
QUALIFIED MUNICIPAL BOND INSURERS. A qualified municipal bond insurer is a
company whose charter limits its risk assumption to insurance of financial
obligations. This precludes the assumption of other types of risk, such as
life, medical, fire and casualty, and 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. 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, to the best of our knowledge, there are no securities in the
Fund's portfolio on which an insurer is paying the principal or interest
otherwise payable by the issuer of the security.
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.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities
markets, the size of a particular offering, the credit rating of the issuer
and the maturity of the obligation. 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 shorter-term securities due to changes in
interest rates, tax laws and other general market conditions. Lower-quality
municipal securities also generally produce higher yields than higher-quality
municipal securities. Lower-quality municipal securities, however, generally
have a higher degree of risk associated with the issuer's ability to make
timely principal and interest payments.
NONAPPROPRIATION RISK OF COPS. A feature that distinguishes COPs from more
traditional forms of municipal debt is the "nonappropriation" clause in the
lease. A nonappropriation clause allows the municipality to 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 municipality 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 municipality was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk may be reduced, although not eliminated, by its
policy of investing only in insured COPs. While there is no limit as to the
amount of assets that the Fund may invest in COPs, as of February 28, 1997,
the Fund held the following percentage of its net assets in COPs or other
municipal leases:
Arizona Fund 8.15%
Florida Fund 7.87%
Insured Fund 5.04%
Massachusetts
Fund 17.48%
Michigan Fund 2.87%
Minnesota Fund 1.25%
Ohio Fund 1.85%
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 that affect the
market as a whole.
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.
NON-DIVERSIFICATION RISK - ARIZONA AND FLORIDA FUNDS ONLY. The Arizona and
Florida Funds are non-diversified series of the Trust. Under the federal
securities laws, this means the Funds are not subject to any restrictions on
the amount of their assets that they may invest in one or more issuers. An
investment in the Arizona or Florida Fund may involve more risk than an
investment in a fund that may not concentrate its investments in one or
relatively few issuers. These risks include increased susceptibility to
adverse economic or regulatory developments. Please see "Investment
Restrictions" in the SAI for the diversification requirements the Funds
intend to meet in order to qualify as regulated investment companies under
the Code.
STATE RISK FACTORS. Since each state specific Fund primarily invests in
municipal securities issued by or on behalf of its respective state, and that
state's local governments, municipalities, authorities, agencies and
political subdivisions, its performance is closely tied to the continuing
ability of issuers of municipal securities in its respective state to meet
their debt obligations and to the economic and political conditions within
the state. Although the Fund's policy of investing primarily in insured
securities may reduce the credit and other risks that may exist on the
municipal securities of the Fund's respective state, it does not eliminate
them. Before investing you should consider the risks discussed in this
prospectus. For more information about the economy of the Fund's respective
state and the Fund's potential risks, please see "State Risk Factors" in the
Appendix at the back of this prospectus and the SAI.
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 Fund's classes of shares. While none is expected, the Board will
act appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. 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.
Together, Advisers and its affiliates manage over $191 billion in assets,
including $44 billion in the municipal securities market. Please see
"Investment Management 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 TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is:
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions
for the Arizona Fund since its inception, the Massachusetts, Michigan and
Minnesota Funds since 1989, and the Insured Fund since 1997. She holds a
Bachelor of Science degree from San Francisco State University. She joined
the Franklin Templeton Group 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,
Massachusetts, Michigan, Minnesota and Ohio Funds 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 the Franklin Templeton Group since
1986. He is a member of several 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 the Franklin Templeton Group 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 1995. He holds a Bachelor of Science degree in
Finance from San Francisco State University. He joined the Franklin Templeton
Group in 1986. He is a member of several securities industry-related
committees and associations.
Stella Wong
Vice President 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 the Franklin
Templeton Group in 1986. She is a member of several securities
industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1997, management
fees paid to Advisers, as a percentage of average monthly net assets, and
total operating expenses of Class I and Class II were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund 0.03%* 0.25%* -
Florida Fund 0.18%* 0.35%* -
Insured Fund 0.46% 0.60% 1.17%
Massachusetts Fund 0.53% 0.68% 1.25%
Michigan Fund 0.47% 0.62% 1.19%
Minnesota Fund 0.50% 0.66% 1.23%
Ohio Fund 0.49% 0.64% 1.20%
*Management fees, before any advance waiver, totaled 0.63% for the Arizona
Fund and the Florida Fund. Total operating expenses were 0.86% for the
Arizona Fund and 0.80% for the Florida Fund. Under an agreement by Advisers
to limit its fees, the Arizona and Florida Funds paid the management fees and
total operating expenses shown. 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, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
does the Fund Buy Securities for its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
The Arizona and Florida Funds and Class I and Class II of the remaining Funds
have separate distribution plans or "Rule 12b-1 Plans" under which they may
pay or reimburse Distributors or others for the expenses of activities that
are primarily intended to sell shares of the Fund or class. These expenses
may include, among others, distribution or service fees paid to Securities
Dealers or others who have executed a servicing agreement with the Fund,
Distributors or its affiliates; a prorated portion of Distributors' overhead
expenses; and the expenses of printing prospectuses and reports used for
sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Arizona and Florida Funds under their plans may not exceed
0.15% per year of the Fund's average daily net assets. Payments by the
remaining Funds 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. During the first year after certain
Class I purchases made without a sales charge, Distributors may keep the Rule
12b-1 fees associated with the purchase.
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 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 are
usually calculated using the maximum sales charges, but certain figures may
not include sales charges.
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 received by the Fund. 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 guarantee 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.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and 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 generally not be liable for
federal income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends are derived from interest income exempt from
regular federal income tax, and are not subject to regular federal income tax
for you. In addition, to the extent that exempt-interest dividends are
derived from interest on obligations of your state of residence or its
political subdivisions, from interest on direct obligations of the federal
government, or from interest on U.S. territorial obligations, including
Puerto Rico, the U.S. Virgin Islands or Guam, they may also be exempt from
personal income tax, if any, in your 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 such market discount
exceeds a de minimis amount. For obligations purchased after April 30, 1993,
a portion of the gain (not to exceed the accrued portion of market discount
as of the time of sale or disposition) is treated as ordinary income rather
than capital gain. Any distribution by the Fund of such market discount
income will be taxable as ordinary income. In any fiscal year, the Fund may
elect not to distribute 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to
you until the following January will be treated, for tax purposes, as if
received by you on December 31 of the calendar year in which they are
declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as
ordinary income. Distributions paid from long-term capital gain will be
taxable to you as long-term capital gain, regardless of the length of time
you have owned Fund shares and regardless of whether such distributions are
received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which 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 disallowed to the extent of any
exempt-interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares
will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be
added to the tax basis that you receive in the purchase of your new 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 is eligible for the corporate dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at
the time they are paid and will, promptly after the close of each calendar
year, advise you of the tax status for federal income tax purposes of such
dividends and distributions, including the portion of the dividends on an
average basis that is taxable income or interest income that is a tax
preference item under the alternative minimum tax. If you have not held
shares of the Fund for a full calendar year, you may have designated as
tax-exempt or as tax preference income a percentage of income that is not
equal to the actual amount of tax-exempt or tax preference income earned
during the period of your investment in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and,
in some states, state alternative minimum taxes. Corporate shareholders are
subject to special rules.
Consistent with its investment objectives, the Fund may buy private activity
bonds if, in Advisers' opinion, the bonds represent the most attractive
investment opportunity then available to the Fund. For the fiscal year ended
February 28, 1997, the Fund derived the following percentage of its income
from bonds, the interest on which is a preference item subject to the federal
alternative minimum tax for certain investors:
Arizona Fund 2.77%
Florida Fund 5.93%
Insured Fund 8.36%
Massachusetts Fund 4.68%
Michigan Fund 4.69%
Minnesota Fund 4.90%
Ohio Fund 6.63%
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, are includible in the tax base for determining the extent to
which a shareholders's social security or railroad retirement benefits will
be subject to federal income tax. You are required to disclose the receipt of
tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal or state income tax
purposes. You should consult with your personal tax advisor on the
deductibility of this interest.
If you are not considered a U.S. person for federal income tax purposes, 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 the income is
distributed to shareholders of a mutual fund. Generally, individual
shareholders of the Fund are afforded tax-exempt treatment at the state level
for distributions derived from municipal securities of their state of
residency. For some investors, a portion of this income may be subject to
state alternative minimum tax.
You should consult your tax advisor to determine the applicability of state
or local income or intangible property taxes to your investment in the Fund
or to distributions or redemption proceeds received from the Fund.
For more information on state income taxes, please see "Appendices - State
Tax Treatment" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Arizona and Florida Funds are non-diversified series of the Trust. The
remaining Funds are diversified series of the Trust, an open-end management
investment company, commonly called a mutual fund. It was organized as a
Massachusetts business trust in September 1984, and is registered with the
SEC. Except for the Arizona and Florida Funds, the Funds offer two classes of
shares: Franklin Insured Tax-Free Income Fund - Class I, Franklin
Massachusetts Insured Tax-Free Income Fund - Class I, Franklin Michigan
Insured Tax-Free Income Fund - Class I, Franklin Minnesota Insured Tax-Free
Income Fund - Class I, Franklin Ohio Insured Tax-Free Income Fund - Class I,
and Franklin Insured Tax-Free Income Fund - Class II, Franklin Massachusetts
Insured Tax-Free Income Fund - Class II, Franklin Michigan Insured Tax-Free
Income Fund - Class II, Franklin Minnesota Insured Tax-Free Income Fund -
Class II, Franklin Ohio Insured Tax-Free Income Fund - Class II. All shares
outstanding before the offering of Class II shares, and all shares of the
Arizona and Florida Funds, are considered Class I shares. Additional series
and 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 any 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 affecting only that class,
or expressly required to be voted on separately by state or federal law.
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.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
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. CURRENTLY, NONE OF THE FUNDS, EXCEPT THE INSURED FUND, ALLOW
INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares.
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." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers 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, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the 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 a 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 Franklin Templeton Fund sales and other 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 front-end sales charge and Contingent
Deferred Sales Charge do not apply to certain purchases. 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.
The Fund's sales charges do 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:
1. Dividend and capital gain distributions from any Franklin Templeton Fund
or a real estate investment trust (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, the 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 considered a redemption for this privilege. The
Contingent Deferred Sales Charge will not be waived if the shares were
subject to a Contingent Deferred Sales Charge when sold. We will credit
your account in shares, at the current value, in proportion to the amount
reinvested for any Contingent Deferred Sales Charge paid in connection
with the earlier redemption, 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.
The Fund's sales charges also do not apply to Class I purchases by:
4. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million 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.
5. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by
the Fund on arbitrage rebate calculations.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
7. Registered Securities Dealers and their affiliates, for their investment
accounts only
8. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
9. 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
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
11. Accounts managed by the Franklin Templeton Group
12. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested.
3. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 2 above will be eligible to
receive the Rule 12b-1 fee associated with the purchase starting in the
thirteenth calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment 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, its investment
objective and policies, 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 want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, 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, for example, 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 Contingent Deferred Sales Charge, such as shares from the
reinvestment of dividends and capital gains ("free shares"), $2,000 in shares
that are no longer subject to a Contingent Deferred Sales Charge because you
have held them for longer than 18 months ("matured shares"), and $3,000 in
shares that are still subject to a Contingent Deferred Sales Charge ("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, except as noted below.
o The accounts must be identically registered. You may, however, 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. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into 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 For the Insured Fund, your exchange may be restricted or refused if you
have: (i) requested an exchange out of the Fund within two weeks of an
earlier exchange request, (ii) exchanged shares out of the Fund more than
twice in a calendar quarter, or (iii) exchanged shares equal to at least
$5 million, or more than 1% of the Fund's net assets. Shares under common
ownership or control are combined for these limits. If you have exchanged
shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged
$5.00. Currently, none of the Funds, except the Insured Fund, allow
investments by Market Timers. Some of the other funds in the Franklin
Templeton Funds may also not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of the Fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class I
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class I shares of the Fund at Net Asset Value.
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. If you would like your redemption proceeds wired
to a bank account, your instructions should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
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 other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire
feature. To sign up, send us written instructions, with a
signature guarantee. To avoid any delay in processing, the
instructions should include the items listed in "By Mail"
above.
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 15 days
- If you do not want the ability to redeem by phone to
apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the Fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently 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
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the CONTINGENCY PERIOD. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated 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 on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem 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 redeemed
annually free of charge.
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 20th 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 Class I
and Class II.
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 - Class I only" 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 before the
reinvestment date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
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.
The Net Asset Value we use when you buy or sell shares is the one 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 your Securities Dealer receives your
request, which is promptly transmitted to the Fund.
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 are 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 an agent, not 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. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
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.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not
be liable for following instructions communicated by telephone if we
reasonably believe they are genuine. For your protection, we may delay a
transaction or not implement one if we are not reasonably satisfied that the
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 us
written instructions, as described elsewhere in this prospectus. If you are
unable to execute a transaction by phone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION
IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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 - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy
additional Class I 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 -
Class I only" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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 - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of 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(R) 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 for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund 177 -
Florida Fund 178 -
Insured Fund 121 221
Massachusetts Fund 118 218
Michigan Fund 119 219
Minnesota Fund 120 220
Ohio Fund 122 221
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
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 - Each Fund, except the Arizona and Florida Funds,
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.
Shares of the Arizona and Florida Funds are considered Class I shares for
redemption, exchange and other purposes.
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.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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
NYSE - New York Stock Exchange
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.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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
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 other wholly
owned subsidiaries of Resources.
APPENDIX
STATE RISK FACTORS
The information provided below is based on information from independent
municipal credit reports and other historically reliable information
available to the Fund as of the date of this prospectus. It is not a complete
analysis of every material fact that may affect the ability of issuers of
municipal securities in the Fund's respective state to meet their debt
obligations or the economic or political conditions within the state. The
information has not been independently verified by the Fund. For more
information about the economy of the Fund's respective state, please see
"Appendices - State Risk Factors" in the SAI.
ARIZONA
A cost of living below the national average and competitive wage rates have
attracted people and businesses to Arizona, especially from California. As a
result, Arizona's population grew by more than 15% during the first half of
the 1990s. Although population growth is expected to remain above-average,
the rate of growth may decline as a result of California's economic recovery
and thus less migration from that state. Employment growth has also been
strong, ranking in the top ten in recent years. Driven recently by gains in
the high-tech manufacturing and export sectors, employment growth is expected
to remain solid over the long-term.
Under its constitution, Arizona is not allowed to issue general obligation
debt. Thus, gross state debt levels have remained moderate. Despite periods
of financial stress during the 1980s and early 1990s, the state's financial
outlook is generally considered stable. The effect of various tax cuts on the
state's budget, especially if the economy slows, are unknown and may create
uncertainties in future years.
FLORIDA
Employment and population have grown steadily in Florida since 1991, and
Florida's economic expansion has been among the strongest in the region, as
well as the nation. As a result, in April 1997, S&P upgraded Florida's
general obligation debt rating from AA to AA+. Other factors S&P considered
were the state's demonstrated financial management strength, steady funding
of the budget stabilization reserve, an economy that continues to diversify,
a strong competitive position in the southeast region, and moderate debt
levels. Florida's population growth has placed increased demands on
education, corrections, and other government services, but so far Florida has
been able to meet these challenges.
MASSACHUSETTS
Massachusetts' economy has continued to recover from the national and
regional recessions of the early 1990s. Despite defense cutbacks, and
restructurings and consolidations in the health care, insurance and banking
industries, the state's employment grew almost 1.5% in 1996. While this rate
was down from the 2.5% growth rate in 1995 and lags the national average, it
is the highest among states in the northeast region. Massachusetts'
high-tech, mutual fund and communications-related industries have steadily
contributed to the state's economic growth. Although the state has maintained
fiscal controls in recent years, its heavy debt burden, one of the highest
among states, remains a concern.
MICHIGAN
Michigan's economy has continued to rely on national economic trends,
especially the demand for durable goods. Its economic base is dependent on
its manufacturing sector, which accounts for more than 33% of the state's
total personal income. While this sector has been strong since the end of the
national recession in the early 1990s, the state's reliance on manufacturing
has made its economy potentially more volatile than the economies of more
diverse states. While Michigan fared better during the last economic slowdown
than in prior slowdowns, its employment losses were more severe than those of
the region or nation. Michigan's losses were mostly due to its significant
dependence on transportation equipment and related durable goods
manufacturing. In recent years, Michigan has made some improvements in the
diversity of its economy, with strong growth in its services sector.
Michigan's fiscal position has improved steadily, prompting S&P to revise the
state's outlook from negative to stable in March 1994. As of March 1997, S&P
still considered Michigan's outlook to be stable. Tighter budget controls and
the positive effect on revenues of the state's strong economy has allowed the
state to replenish its reserves, which had been severely depleted during the
early 1990s.
MINNESOTA
Minnesota's economy has been well diversified, with only some concentration
in the manufacturing sector. This diversification has allowed the state to
perform well during economic cycles, compared with the rest of the nation.
The effects of the last national recession were less severe in Minnesota, and
the state was able to recover more quickly than many other states.
Since late 1994, Minnesota has experienced steady job growth with increases
in computer and business services and in the finance sector. Much of this
growth has occurred in the Minneapolis-St. Paul metropolitan area and has
created labor shortages in some industries. These shortages have in turn
resulted in higher-than-average wage levels. Higher wages, together with a
tight labor market, could limit future job expansion in the state.
Minnesota's debt burden has been moderate and its financial position strong.
The recent strength of its economy and growth in revenues have allowed the
state to restore its general fund and reserve levels, which had been drained
during the recession of the early 1990s.
OHIO
Ohio's financial performance has been historically strong, aided recently by
the continuing diversification of the state's economy. Although manufacturing
has remained a large part of the economy, at 21.1% in 1995 versus 15.9% for
the U.S., the state's overall employment mix has moved more in line with that
of the nation. While benefiting from the recent strength of its manufacturing
sector, growth in financial services, distribution and trade have improved
the state's economic stability. The state's sizable financial reserves may
also lend some stability and help protect the state against future spending
pressures and economic cycles.
PROSPECTUS & APPLICATION
FRANKLIN
TAX-FREE
TRUST
- ----------------------------------------------------------------------------
JULY 1, 1997
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
INVESTMENT STRATEGY
TAX-FREE INCOME
THIS PROSPECTUS DESCRIBES THE TEN SERIES OF THE FRANKLIN TAX-FREE TRUST (THE
"TRUST") LISTED ABOVE. EACH SERIES MAY INDIVIDUALLY OR TOGETHER BE REFERRED TO
AS THE "FUND(S)". THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE FUND. PLEASE KEEP IT FOR FUTURE REFERENCE.
THE FUND HAS A STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JULY 1, 1997,
WHICH MAY BE AMENDED FROM TIME TO TIME. IT 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 ITS
ADDRESS.
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, JURISDICTION OR COUNTRY 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.
FRANKLIN
TAX-FREE
TRUST
JULY 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. 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? ....... 23
What are the Fund's Potential Risks? ....... 26
Who Manages the Fund? ...................... 28
How does the Fund Measure Performance? ..... 32
How Taxation Affects the Fund and its
Shareholders .......................... 33
How is the Trust Organized? ................ 36
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ...................... 37
May I Exchange Shares for Shares
of Another Fund? .......................... 42
How Do I Sell Shares? ...................... 44
What Distributions Might I Receive from
the Fund? ................................. 47
Transaction Procedures and Special
Requirements .............................. 48
Services to Help You Manage Your Account.... 52
What If I Have Questions About My Account?.. 55
GLOSSARY
Useful Terms and Definitions................ 56
APPENDIX
State Risk Factors ........................ 58
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 28, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
NORTH
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Charge(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%
Paid at time of
purchase++ 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at redemption+++
NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
CLASS II
Maximum Sales Charge(as a percentage
of Offering Price)
1.99% 1.99% 1.99% - 1.99% 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase++++
1.00% 1.00% 1.00% - 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption+++
0.99% 0.99% 0.99% - 0.99% 0.99% 0.99% 0.99% 0.99% 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management Fees
0.57% 0.47% 0.59% 0.63%* 0.61% 0.57% 0.55% 0.55% 0.60% 0.54%
Rule 12b-1 Fees**
0.08% 0.08% 0.08% 0.09% 0.08% 0.09% 0.08% 0.09% 0.08% 0.08%
-----------------------------------------------------------------------------------------------------------------
Other expenses
0.06% 0.05% 0.08% 0.09% 0.07% 0.07% 0.07% 0.06% 0.07% 0.07%
=================================================================================================================
Total Fund Operating Expenses
0.71% 0.60% 0.75% 0.81%* 0.76% 0.73% 0.70% 0.70% 0.75% 0.69%
CLASS II
Management Fees
0.57% 0.47% 0.59% - 0.61% 0.57% 0.55% 0.55% 0.60% 0.54%
Rule 12b-1 Fees**
0.65% 0.65% 0.65% - 0.65% 0.63% 0.65% 0.65% 0.65% 0.64%
Other Expenses
0.06% 0.05% 0.08% - 0.07% 0.07% 0.07% 0.06% 0.07% 0.07%
------------------------------------------------------------------------------------------------------------------
Total Fund Operating Expenses
1.28% 1.17% 1.32% - 1.33% 1.27% 1.27% 1.26% 1.32% 1.25%
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.
NORTH
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year*** $ 49 $ 48 $ 50 $ 50 $ 50 $ 50 $ 49 $ 49 $ 50 $ 49
3 Years $ 64 $ 61 $ 65 $ 67 $ 66 $ 65 $ 64 $ 64 $ 65 $ 64
5 Years $ 80 $ 75 $ 82 $ 86 $ 83 $ 81 $ 80 $ 80 $ 82 $ 79
10 Years $127 $114 $132 $138 $133 $129 $126 $126 $132 $125
CLASS II
1 Year $ 33 $ 32 $ 33 - $ 33 $ 33 $ 33 $ 33 $ 33 $ 33
3 Years $ 50 $ 47 $ 51 - $ 52 $ 50 $ 50 $ 50 $ 51 $ 49
5 Years $ 80 $ 74 $ 82 - $ 82 $ 79 $ 79 $ 78 $ 82 $ 78
10 Years $163 $151 $167 - $169 $162 $162 $161 $167 $160
</TABLE>
For the same Class II investment, you would pay projected expenses of $22 for
the Florida Fund and $23 for each of the remaining Funds 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.
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. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for
this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
++++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."
*For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.16% and total operating
expenses were 0.34%.
**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.
***Assumes a Contingent Deferred Sales Charge will not apply.
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 28, 1997. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
ALABAMA FUND - CLASS I
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at Beginning
of Period $11.73 $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59 $10.54 $10.00
----------------------------------------------------------------------------------------
Net Investment Income .65 .66 .66 .66 .68 .66 .71 .75 .79 .44
Net Realized
& Unrealized
Gain (Loss) on
Securities .011 .416 (.500) .094 .714 .346 .068 .168 .005 .210
-----------------------------------------------------------------------------------------
Total From
Investment
Operations .661 1.076 .160 .754 1.394 1.006 .778 .918 .795 .650
==========================================================================================
Distributions
From Net
Investment
Income (.661) (.656) (.650) (.664) (.684) (.756) (.768) (.768) (.723) (.110)
Distributions From Reaized - - - - - - - - (.022) -
----------------------------------------------------------------------------------------------
Total Distributions (.661) (.656) (.650) (.664) (.684) (.756) (.768) (.768) (.745) (.110)
-----------------------------------------------------------------------------------------------
Net Asset Value at
End of Period $11.73 $11.73 $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59 $10.54
================================================================================================
Total Return+ 5.84% 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) $193,466 $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*** .71% .72% .72% .64% .68% .71% .70% .42% -% -%
Ratio of Net
Investment
Income to
Average
Net Assets 5.62% 5.69% 5.88% 5.62% 6.04% 6.21% 6.45% 6.69% 7.33% 5.64%*
Portfolio
Turnover Rate 15.47% 12.39% 19.85% 14.87% 11.27% 1.21% 28.36% 4.97% 12.70% 54.25%
</TABLE>
ALABAMA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.77 $11.36
-----------------------
Net Investment Income .59 .49
Net Realized & Unrealized Gain (Loss)
on Securities .011 .405
------------------------
Total From Investment Operations .601 .895
========================
Distributions From Net Investment Income (.591) (.485)
Distributions From Realized Capital Gains - -
------------------------
Total Distributions (.591) (.485)
------------------------
Net Asset Value at End of Period $11.78 $11.77
========================
Total Return+ 5.28% 8.01%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $5,683 $1,662
Ratio of Expenses to Average Net Assets*** 1.28% 1.29%*
Ratio of Net Investment Income to
Average Net Assets 5.05% 5.09%*
Portfolio Turnover Rate 15.47% 12.39%
<TABLE>
<CAPTION>
FLORIDA FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value
at
Beginning
of Period $11.69 $11.35 $11.77 $11.68 $11.04 $10.75 $10.73 $10.59 $10.61 $10.00
-----------------------------------------------------------------------------------
Net
Investment
Income .67 .69 .69 .70 .71 .71 .73 .73 .81 .46
Net Realized
& Unrealized
Gain (Loss)
on Securities (.085) .338 (.436) .086 .647 .348 .091 .226 (.041) .333
--------------------------------------------------------------------------------------
Total From
Investment
Operations .585 1.028 .254 .786 1.357 1.058 .821 .956 .769 .793
=====================================================================================
Distributions
From Net
Investment
Income (.685) (.688) (.674) (.696) (.717) (.768) (.801) (.816) (.781) (.183)
--------------------------------------------------------------------------------------
Distributions
From
Realized
Capital
Gains - - - - - - - - (.008) -
-------------------------------------------------------------------------------------
Total
Distributions (.685) (.688) (.674) (.696) (.717) (.768) (.801 (.816) (.789) (.183)
---------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period $11.59 $11.69 $11.35 $11.77 $11.68 $11.04 $10.7 $10.73 $10.59 $10.61
============================================================================================
Total Return+ 5.20% 9.28% 2.36% 6.63% 12.45% 10.02% 7.69% 8.98% 7.28% 14.36%*
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of Period
(in 000's) $1,458,087$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*** .60% .60% .59% .52% .54% .54% .57% .66% .24% -%
Ratio of
Net Investment
Income to
Average Net
Assets 5.78% 5.93% 6.15% 5.90% 6.30% 6.60% 6.76% 6.40% 6.42% 6.22%*
Portfolio
Turnover 12.00% 11.78% 14.34% 11.77% 11.72%16.69% 10.80% 8.50% 8.64% 40.02%
</TABLE>
FLORIDA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.76 $11.37
--------------------
Net Investment Income .60 .52
Net Realized & Unrealized Gain
(Loss) on Securities (.072) .382
---------------------
Total From Investment Operations .528 .902
=====================
Distributions From Net Investment Income (.618) (.512)
Distributions From Realized Capital Gains - -
--------------------
Total Distributions (.618) (.512)
----------------------
Net Asset Value at End of Period $11.67 $11.76
======================
Total Return+ 4.65% 8.05%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $23,556 $7,644
Ratio of Expenses to Average Net Assets*** 1.17% 1.18%*
Ratio of Net Investment Income
to Average Net Assets 5.17% 5.33%*
Portfolio Turnover Rate 12.00% 11.78%
<TABLE>
<CAPTION>
GEORGIA FUND - CLASS I
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period $11.88 $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59 $10.55 $10.00
-------------------------------------------------------------------------------------
Net Investment
Income .65 .66 .66 .66 .68 .65 .72 .79 .80 .44
Net Realized
& Unrealized
Gain (Loss)
on Securities (.022) .343 (.458) .154 .658 .349 .098 .264 (.034) .230
--------------------------------------------------------------------------------------
Total From
Investment
Operations .628 1.003 .202 .814 1.338 .999 .818 1.054 .766 .670
=======================================================================================
Distributions
From Net
Investment Income (.648) (.663) (.662) (.664) (.668) (.759) (.778) (.744) (.720) (.120)
Distributions
From Realized
Capital Gains - - - - - - - - (.006) -
--------------------------------------------------------------------------------------
Total
Distributions (.648) (.663) (.662) (.664) (.668) (.759) (.778) (.744) (.726) (.120)
-------------------------------------------------------------------------------------
Net Asset
Value at
End of Period $11.86 $11.88 $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59 $10.55
==============================================================================================
Total Return+ 5.47% 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) $139,903 $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*** .75% .77% .76% .69% .71% .72% .56% .09% -% -%
Ratio of
Net
Investment
Income to
Average Net
Assets 5.49% 5.58% 5.76% 5.48% 5.91% 6.11% 6.53% 7.07% 7.31% 5.98%*
Portfolio
Turnover Rate 17.47% 10.98% 36.17% 16.75% 17.10% 6.18% 1.20% 14.43% 12.23% 22.93%
</TABLE>
GEORGIA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- --------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.92 $11.57
-----------------
Net Investment Income .58 .50
Net Realized
& Unrealized
Gain (Loss)
on Securities (.006) .343
------------------
Total From Investment Operations .574 .843
=====================
Distributions
From Net
Investment
Income (.574) (.493)
Distributions
From
Realized
Capital
Gains - -
--------------------
Total
Distributions (.574) (.493)
------------------
Net Asset
Value at
End of
Period $11.92 $11.92
==================
Total Return+ 4.97% 7.40%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of
Period
(in 000's) $4,484 $1,335
Ratio
of
Expenses
to
Average Net Assets*** 1.32% 1.34%*
Ratio of Net
Investment
Income to
Average
Net Assets 4.87% 5.04%*
Portfolio
Turnover Rate 17.47% 10.98%
KENTUCKY FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 19923
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset
Value at
Beginning
of Period $11.04 $10.54 $11.18 $11.05 $10.30 $10.00
--------------------------------------------------
Net
Investment
Income .61 .62 .61 .63 .57 .15
Net Realized
& Unrealized
Gain (Loss)
on Securities .012 0.495 (.625) .164 .832 .164
------------------------------------------------
Total From
Investment
Operations .622 1.115 (.015) .794 1.402 .314
================================================
Distributions
From Net
Investment
Income (.612) (.615) (.625) (.664) (.652) (.014)
Distributions
From Realized
Capital
Gains - - - - - -
---------------------------------------------
Total
Distributions (.612) (.615) (.625) (.664) (.652) (.014)
--------------------------------------------------
Net Asset
Value at
End of
Period $11.05 $11.04 $10.54 $11.18 $11.05 $10.30
==================================================
Total Return+ 5.86% 10.73% .11% 7.07% 13.81% 8.37%*
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of Period
(in 000's) $44,289 $38,991 $32,831 $28,057 $11,678 $3,032
Ratio of
Expenses
to
Average
Net Assets*** .34% .33% .29% -% -% -%
Ratio of
Net
Investment
Income
to Average
Net Assets 5.63% 5.65% 5.94% 5.73% 6.11% 3.52%*
Portfolio
Turnover
Rate 24.81% 31.89% 32.92% 13.22% 18.41% 53.90%
<TABLE>
<CAPTION>
LOUISIANA FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value
at
Beginning
of
Period $11.32 $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39 $10.41 $10.00
-------------------------------------------------------------------------------------
Net
Investment
Income .65 .66 .66 .67 .69 .67 .71 .78 .78 .46
Net
Realized
& Unrealized
Gain (Loss)
on Securities .001 .281 (.549) (.005) .668 .326 .182 .202 (.028) .136
-----------------------------------------------------------------------------------
Total
From
Investment
Operations .649 .941 .111 .665 1.358 .996 .892 .982 .752 .596
===================================================================================
Distributions
From Net
Investment
Income (.649) (.651) (.641) (.675) (.688) (.776) (.792) (.792) (.772) (.186)
Distributions
From Realized
Capital Gains - - - - - - - - - -
--------------------------------------------------------------------------------------
Total Distributions (.649) (.651) (.641) (.675) (.688) (.776) (.792) (.792) (.772) (.186)
======================================================================================
Net
Asset
Value
at End
of
Period $11.32 $11.32 $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39 $10.41
=====================================================================================
Total
Return+ 5.94% 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) $112,981 $107,461 $104,980 $115,971 $95,368 $72,923 $35,862 $17,696 $4,25 $1,247
Ratio
of
Expenses
to Average
Net Assets*** .76% .78% .75% .68% .70% .70% .56% .04% -% -%
Ratio of Net
Investment
Income
to Average
Net Assets 5.76% 5.89% 5.98% 5.70% 6.18% 6.33% 6.60% 7.10% 7.33% 6.21%*
Portfolio
Turnover
Rate 13.68% 5.23% 32.28% 17.63% 23.37% 10.51% 0.76% 16.65% 5.91% 18.12%
</TABLE>
LOUISIANA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset
Value at
Beginning
of Period $11.37 $11.01
-----------------------------------
Net
Investment
Income .58 .49
Net Realized
& Unrealized
Gain (Loss)
on
Securities (.001) .351
----------------------------------
Total From
Investment
Operations .579 .841
=================================
Distributions
From Net
Investment
Income (.579) (.481)
Distributions
From Realized
Capital Gains - -
-----------------------------
Total Distributions (.579) (.481)
-----------------------------
Net Asset
Value at
End of Period $11.37 $11.37
===============================
Total Return+ 5.27% 7.76%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of Period
(in 000's) $3,004 $1,438
Ratio of
Expenses
to Average Net Assets*** 1.33% 1.35%*
Ratio of Net
Investment
Income to
Average Net Assets 5.29% 5.27%*
Portfolio Turnover Rate 13.68% 5.23%
<TABLE>
<CAPTION>
MARYLAND FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 19894
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value
at
Beginning
of Period $11.38 $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07 $10.00
-----------------------------------------------------------------------------
Net
Investment
Income .61 .62 .63 .64 .65 .64 .68 .72 .18
Net
Realized
& Unrealized
Gain (Loss)
on
Securities (.035) .467 (.453) .092 .672 .300 .096 .192 (.054)
---------------------------------------------------------------------------------
Total
From
Investment
Operations .575 1.087 .177 .732 1.322 .940 .776 .912 .126
================================================================================
Distributions From
Net Investment
Income (.625) (.627) (.617) (.642) (.652) (.710) (.716) (.672) (.056)
Distributions
From Realized
Capital
Gai - - - - - - - - -
-------------------------------------------------------------------------------
Total
Distributions (.625) (.627) (.617) (.642) (.652) (.710) (.716) (.672) (.056)
================================================================================
Net Asset Value
at End
of Period $11.33 $11.38 $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07
================================================================================
Total Return+ 5.24% 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) $185,234 $175,078 $153,145 $156,683$115,873 $71,538 $33,421 $14,004 $3,313
Ratio
of
Expenses
to
Average
Net Assets*** .73% .74% .73% .66% .71% .71% .54% .07% -%
Ratio of
Net
Investment
Income
to
Average
Net
Assets 5.42% 5.56% 5.86% 5.58% 6.00% 6.15% 6.50% 6.84% 4.26%*
Portfolio
Turnover
Rate 12.71% 8.11% 20.30% 18.38% 14.73% 16.65% 12.14% 6.03% 11.78%
</TABLE>
MARYLAND FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value
at Beginning
of Period $11.44 $10.93
-----------------------------------
Net
Investment
Income .55 .47
Net Realized
& Unrealized
Gain (Loss)
on Securities (.033) .506
----------------------------------
Total
From
Investment
Operations .517 .976
===================================
Distributions
From Net
Investment
Income (.557) (.466)
------------------------------------
Distributions
From Realized
Capital
Gains - -
------------------------------------
Total
Distributions (.557) (.466)
------------------------------------
Net Asset
Value
at End
of
Period $11.40 $11.44
===================================
Total
Return+ 4.68% 9.06%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of Period
(in 000's) $5,084 $913
Ratio of
Expenses
to Average
Net Assets*** 1.27% 1.31%*
Ratio of
Net
Investment
Income to
Average Net
Assets 4.78% 4.95%*
Portfolio
Turnover
Rate 12.71% 8.11%
<TABLE>
<CAPTION>
MISSOURI FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value
at
Beginning
of Period $11.94 $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44 $10.35 $10.00
--------------------------------------------------------------------------------------
Net
Investment
Income .65 .65 .65 .66 .68 .65 .69 .74 .78 .46
Net
Realized
& Unrealized
Gain
(Loss) on
Securities (.069) .494 (.501) .206 .676 .409 .154 .198 .017 .058
--------------------------------------------------------------------------------------
Total
From
Investment
Operations .581 1.144 .149 .866 1.356 1.059 .844 .938 .797 .518
=====================================================================================
Distributions
From Net
Investment
Income (.649) (.644) (.649) (.676) (.676) (.729) (.744) (.738) (.707) (.168)
Distributions
From
Realized
Capital Gains (.042) - - - - - - - - -
--------------------------------------------------------------------------------------
Total
Distributions (.691) (.644) (.649) (.676) (.676) (.729) (.744) (.738) (.707) (.168)
----------------------------------------------------------------------------------------
Net Asset
Value at
End of
Period $11.83 $11.94 $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44 $10.35
========================================================================================
Total
Return+ 5.06% 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) $269,564 $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*** .70% .71% .70% .64% .67% .71% .72% .40% -% -%
Ratio of
Net
Investment
Income to
Average
Net Assets 5.56% 5.58% 5.75% 5.55% 6.03% 6.21% 6.42% 6.66% 7.30% 6.27%*
Portfolio
Turnover Rate 21.81% 18.27% 19.84% 11.02% 10.28% 16.40% 40.08% 8.69% 7.15% 28.32%
</TABLE>
MISSOURI FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset
Value
at
Beginning
of Period $11.97 $11.47
-----------------------------------
Net Investment Income .57 .48
Net Realized
& Unrealized
Gain (Loss)
on Securities (.072) .497
-----------------------------------
Total From
Investment
Operations .498 .977
===================================
Distributions
From Net
Investment
Income (.576) (.477)
Distributions
From Realized
Capital Gains (.042) -
----------------------------------
Total Distributions (.618) (.477)
-----------------------------------
Net Asset
Value at
End of
Period $11.85 $11.97
===================================
Total
Return+ 4.32% 8.66%
RATIOS/SUPPLEMENTAL DATA
Net
Assets
at End
of
Period (in 000's) $4,295 $1,325
Ratio
of
Expenses
to
Average
Net Assets*** 1.27% 1.27%*
Ratio of
Net
Investment
Income to
Average
Net Assets 4.92% 4.94%*
Portfolio
Turnover
Rate 21.81% 18.27%
<TABLE>
<CAPTION>
NORTH CAROLINA FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Asset
Value
at
Beginning
of Period $11.75 $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55 $10.46 $10.00
--------------------------------------------------------------------------------------
Net
Investment
Income .64 .64 .65 .65 .67 .64 .70 .74 .77 .43
Net
Realized
& Unrealized
Gain (Loss)
on Securities (.030) .391 (.550) .054 .754 .352 .124 .221 .056 .206
-------------------------------------------------------------------------------------
Total From
Investment
Operations .610 1.031 .100 .704 1.424 .992 .824 .961 .826 .636
======================================================================================
Distributions
From Net
Investment
Income (.630) (.651)** (.650) (.664) (.664) (.732) (.742) (.720) (.715) (.176)
Distributions
From Realized
Capital
Gains - - - - - - (.012) (.001) (.021) -
-----------------------------------------------------------------------------------
Total Distributions (.630) (.651) (.650) (.664) (.664) (.732) (.754) (.721) (.736) (.176)
-----------------------------------------------------------------------------------------
Net Asset
Value
at End
of
Period $11.73 $11.75 $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55 $10.46 (.176)
============================================================================================
Total
Return+ 5.38% 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) $260,979 $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*** .70% .71% .70% .63% .67% .71% .74% .50% -% -%
Ratio
of
Net
Investment
Income to
Average
Net Assets 5.47% 5.52% 5.75% 5.44% 5.86% 6.03% 6.37% 6.68% 7.09% 5.89%*
Portfolio
Turnover
Rate 9.98% 25.19% 25.05% 3.86% 8.48% 3.16% 7.99% 11.80% 12.35% 10.34%
</TABLE>
NORTH CAROLINA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net
Asset
Value
at
Beginning
of
Period $11.80 $11.41
-----------------------------------
Net
Investment Income .57 .49
Net Realized
& Unrealized
Gain (Loss)
on Securities (.018) .384
----------------------------------
Total From
Investment
Operations .552 .874
=================================
Distributions
From Net
Investment
Income (.562) (.484)
Distributions
From Realized
Capital
Gains - -
-----------------------------
Total
Distributions (.562) (.484)
-----------------------------------
Net Asset
Value at
End of
Period $11.79 $11.80
===================================
Total Return+ 4.83% 7.77%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of
Period
(in 000's) $9,607 $2,430
Ratio of
Expenses
to
Average
Net Assets*** 1.26% 1.28%*
Ratio of
Net
Investment
Income to
Average
Net Assets 4.85% 4.90%*
Portfolio
Turnover
Rate 9.98% 25.19%
<TABLE>
<CAPTION>
TEXAS FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Asset
Value
at
Beginning
of Period $11.58 $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59 $10.56 $10.00
----------------------------------------------------------------------------------------
Net
Investment
Income .66 .67 .68 .69 .69 .67 .73 .84 .78 .50
Net Realized
& Unrealized
Gain (Loss)
on Securities .001 .335 (.487) .032 .661 .370 .104 .114 .044 .255
--------------------------------------------------------------------------------------
Total From
Investment
Operations .661 1.005 .193 .722 1.351 1.040 .834 .954 .824 .755
======================================================================================
Distributions
From Net
Investment
Income (.673) (.675) (.663) (.692) (.691) (.780) (.804) (.804) (.794) (.195)
Distributions
From Realized
Capital
Gains (.198) - - - - - - - - -
----------------------------------------------------------------------------------------
Total Distributions (.871) (.675) (.663) (.692) (.691) (.780) (.804) (.804) (.794) (.195)
Net Asset
Value at end
of Period $11.37 $11.58 $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59 $10.56
=========================================================================================
Total Return+ 5.91% 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) $126,612 $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*** .75% .76% .73% .65% .66% .70% .40% -% -% -%
Ratio
of Net
Investment
Income to
Average
Net Assets 5.70% 5.86% 6.05% 5.85% 6.15% 6.14% 6.46% 7.26% 7.65% 6.61%*
Portfolio
Turnover 35.57% 18.38% 6.36% 20.18% 12.33% 6.44% 0.55% 3.53% 6.95% 41.50%
</TABLE>
TEXAS FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset
Value at
Beginning
of Period $11.68 $11.27
-----------------------------------
Net
Investment
Income .60 .51
Net Realized
& Unrealized
Gain (Loss)
on Securities .019 .403
---------------------------------
Total From
Investment
Operations .619 .913
=================================
Distributions
From Net
Investment
Income (.611) (.503)
Distributions
From Realized
Capital
Gains (.198) -
----------------------------------
Total
Distributions (.809) (.503)
-----------------------------------
Net Asset
Value at
End of
Period $11.49 $11.68
===================================
Total
Return+ 5.48% 8.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End
of
Period
(in 000's) $740 $79
Ratio
of
Expenses
to
Average
Net Assets*** 1.32% 1.33%*
Ratio of
Net
Investment
Income
to
Average
Net Assets 5.03% 5.23%*
Portfolio
Turnover
Rate 35.57% 18.38%
<TABLE>
<CAPTION>
VIRGINIA FUND - CLASS I
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Asset
Value
at
Beginning
of
Period $11.72 $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43 $10.45 $10.00
-------------------------------------------------------------------------------------
Net
Investment
Income .65 .66 .66 .67 .67 .66 .69 .73 .77 .44
Net
Realized
& Unrealized
Gain (Loss)
on
Securities (.067) .381 (.499) .136 .704 .362 .136 .226 (.034) .199
-----------------------------------------------------------------------------
Total
From
Investment
Operations .583 1.041 .161 .806 1.374 1.022 .826 .956 .736 .639
===================================================================================
Distributions
From Net
Investment
Income (.649) (.651) (.651) (.676) (.664) (.742) (.756) (.756) (.756) (.189)
Distributions
From
Realized
Capital
Gains (.004) - - - - - - - - -
--------------------------------------------------------------------------------
Total
Distributions (.653) (.651) (.651) (.676) (.664) (.742) (.756) (.756) (.756) (.189)
-------------------------------------------------------------------------------------
Net
Asset
Value
at
End
of
Period $11.65 $11.72 $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43 $10.45
=====================================================================================
Total
Return+ 5.15% 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) $287,172 $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*** .69% .69% .69% .62% .65% .68% .72% .60% .16% -%
Portfolio
Turnover
Rate 19.25% 12.96% 21.73% 6.86% 5.74% 4.33% 2.56% 1.06% 3.92% 65.51%
</TABLE>
VIRGINIA FUND - CLASS II
YEAR ENDED FEB. 28 1997 19962
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net
Asset
Value
at
Beginning
of
Period $11.77 $11.35
--------------------------------
Net
Investment
Income .58 .49
Net Realized
& Unrealized
Gain (Loss)
on
Securities (.055) .412
--------------------------------
Total
From
Investment
Operations .525 .902
=========================================
Distributions
From Net
Investment
Income (.581) (.482)
Distributions
From
Realized
Capital
Gains (.004) -
------------------------------------
Total
Distributions (.585) (.482)
--------------------------------
Net
Asset
Value
at
End
of
Period $11.71 $11.77
================================
Total Return+ 4.61% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net
Assets
at End
of
Period
(in 000's) $6,674 $2,050
Ratio
of
Expenses
to
Average
Net
Assets*** 1.25% 1.26%*
Ratio
of
Net
Investment
Income
to
Average
Net Assets 4.94% 5.06%*
Portfolio
Turnover
Rate 19.25% 12.72%
1FOR THE PERIOD SEPTEMBER 1, 1987 (EFFECTIVE DATE) TO FEBRUARY 29, 1988.
2FOR THE PERIOD MAY 1, 1995 (EFFECTIVE DATE) TO FEBRUARY 29, 1996.
3FOR THE PERIOD SEPTEMBER 10, 1991 (EFFECTIVE DATE) TO FEBRUARY 29, 1992.
4FOR THE PERIOD OCTOBER 3, 1988 (EFFECTIVE DATE) TO FEBRUARY 28, 1989.
+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 AT NET ASSET VALUE. BEFORE
MAY 1, 1994, DIVIDENDS WERE REINVESTED AT THE MAXIMUM OFFERING PRICE, AND
CAPITAL GAINS AT NET ASSET VALUE. EFFECTIVE MAY 1, 1994, WITH THE IMPLEMENTATION
OF THE RULE 12B-1 DISTRIBUTION PLANS FOR CLASS I SHARES, THE SALES CHARGES ON
REINVESTED DIVIDENDS WERE ELIMINATED.
*ANNUALIZED.
**INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$0.001.
***FOR THE PERIODS INDICATED, ADVISERS AGREED IN ADVANCE TO LIMIT ITS MANAGEMENT
FEES AND TO MAKE CERTAIN PAYMENTS TO REDUCE THE FUND'S EXPENSES. 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
- ------------------------------------------
ALABAMA FUND:
19881 0.86%*
1989 0.74
1990 0.72
1991 0.72
FLORIDA FUND:
19881 0.88%*
1989 0.74
1990 0.66
GEORGIA FUND:
19881 0.87%*
1989 0.76
1990 0.74
1991 0.74
KENTUCKY FUND:
19923 0.82%*
1993 0.81
1994 0.71
1995 0.80
1996 0.82
1997 0.81
LOUISIANA FUND:
19881 0.88%*
1989 0.73
1990 0.70
1991 0.72
MARYLAND FUND:
19894 0.65%*
1990 0.73
1991 0.73
MISSOURI FUND:
19881 0.87%*
1989 0.77
1990 0.72
NORTH CAROLINA FUND:
19881 0.87%*
1989 0.74
1990 0.71
TEXAS FUND:
19881 0.89%*
1989 0.76
1990 0.71
1991 0.75
VIRGINIA FUND:
19881 0.87%*
1989 0.75
1990 0.72
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent investing,
while seeking preservation of shareholders' capital. The 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 objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The 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, 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.
The Fund invests at least 65% of its total assets in municipal securities issued
by or on behalf of its respective state, and that state's local governments,
municipalities, authorities, agencies and political subdivisions. It is
possible, although not anticipated, that up to 35% of the Fund's total assets
could be in municipal securities of a state, territory or local government other
than its respective state.
Some states may require a fund to invest a certain amount of its assets in
securities of that state, or in securities that are otherwise tax-exempt under
the laws of that state, in order for any portion of the fund's distributions to
be exempt from the state's personal income taxes. If the Fund's respective state
requires this, the Fund will attempt to invest its assets as required so that
its distributions will be exempt from personal income taxes for resident
shareholders of that state.
The Fund invests in investment grade securities. Investment grade securities are
securities rated in one of the four highest rating categories of a nationally
recognized rating service, such as Moody's, S&P or Fitch, and also include
unrated securities that Advisers considers comparable in quality to securities
that have been rated investment grade. The four highest rating categories are
Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for both S&P and Fitch.
Although securities rated in the fourth highest rating category are considered
investment grade, they are generally more vulnerable to adverse economic
conditions than securities rated in the three highest categories and are
considered to have some speculative characteristics. If the rating services
lower the rating on a security in the Fund's portfolio, the Fund will consider
this change in its evaluation of the security's overall investment merits. A
change in a security's rating, however, does not automatically require the Fund
to sell the security. For a description of the various rating categories, please
see "Appendices - Description of Ratings" in the SAI.
When determining whether securities are consistent with the Fund's investment
objectives and policies and thereafter when determining an issuer's comparative
credit rating, Advisers considers the terms of an offering and various other
factors. Advisers may, among other things, (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) analyze the issuer's
financial and credit position, including all appropriate ratios; and (iv)
compare other similar securities offerings to the issuer's proposed offering.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
total assets in taxable obligations, including (i) municipal securities of a
state or local government other than its respective state; (ii) commercial paper
rated at least P-1 by Moody's, A-1 by S&P, or F-1 by Fitch; or (iii) obligations
issued or guaranteed by the full faith and credit of the U.S. government.
MUNICIPAL SECURITIES. Municipal securities are obligations that pay interest
exempt from federal income tax and that are issued by or on behalf of states,
territories or possessions of the U.S., the District of Columbia, or their
political subdivisions, agencies or instrumentalities. An opinion as to the
tax-exempt status of a municipal security is generally given to the issuer by
the issuer's bond counsel when the security is issued.
Municipal securities are issued 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 Fund has no restrictions on the maturity of municipal securities in which it
may invest. The Fund attempts 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 when determining the securities it wants to buy and whether to hold
securities currently in the Fund's portfolio.
The Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic, business,
political or other change that affects one security may also affect other
securities in the same market segment, thereby potentially increasing market
risk. Examples of changes that may affect certain market segments include
proposed legislation affecting the financing of a project, shortages or price
increases of needed materials, or declining markets or needs for the projects.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating and variable
rate obligations. The interest rates on these obligations are not fixed, but
vary with changes in prevailing market rates on predesignated dates. The Fund
may also invest in floating or variable rate demand notes ("VRDNs"). VRDNs carry
a demand feature that allows the Fund to tender the obligation back to the
issuer or a third party before maturity, at par value plus accrued interest,
according to the terms of the obligation. Although it is not a put option in the
usual sense, the demand feature is sometimes known as a "put." Frequently, VRDNs
are secured by letters of credit or other credit support arrangements. The Fund
limits its purchase of floating and variable rate obligations to those that are
investment grade.
With respect to 75% of the total value of the Fund's assets, no more than 5% may
be in securities underlying "puts" from the same institution. The Fund may,
however, invest up to 10% of its assets in unconditional "puts", which are
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 restrictions in this paragraph do not apply to the Maryland
Fund.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs are
widely used by state and local governments to finance the purchase of property
and function much like installment purchase agreements. COPs are created when
long-term lease revenue obligations are issued by a governmental corporation to
pay for the acquisition of property or facilities. The property or facilities
acquired are then leased to a municipality and the lease payments are used to
repay interest and principal on the obligations issued to buy the property.
After all of the lease payments have been made, according to the terms of the
lease, 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. Thus, COPs may enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may not
be called. This period usually lasts for five to ten years. 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 these
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.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These are
trading practices where payment and delivery of the securities take place at a
future date. These transactions are subject to market fluctuations and the risk
that the value of a security at delivery may be more or less than its 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, it will maintain cash or liquid securities, with an aggregate
value equal to the amount of its purchase commitments, in a segregated account
with its custodian bank until payment is made. The Fund will not engage in
when-issued and delayed delivery transactions for investment leverage purposes.
BORROWING. The Fund may borrow up to 5% of its total assets from banks for
temporary or emergency purposes. Although the Fund does not currently intend to
do so, the Fund may also 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's policy is not to invest more than 10% of its
net assets 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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
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.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities markets,
the size of a particular offering, the credit rating of the issuer and the
maturity of the obligation. 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 shorter-term securities due to changes in interest rates, tax laws
and other general market conditions. Lower-quality municipal securities also
generally produce higher yields than higher-quality municipal securities.
Lower-quality securities, however, generally have a higher degree of risk
associated with the issuer's ability to make timely principal and interest
payments.
NONAPPROPRIATION RISK OF COPS. A feature that distinguishes COPs from more
traditional forms of municipal debt is the "nonapropriation" clause in the
lease. A nonappropriation clause allows the municipality to 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 municipality 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
municipality was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk may be reduced, although not eliminated, by its policy
of investing only in investment grade COPs. When assessing the risk of
nonappropriation, the rating services and Advisers consider, among other
factors, 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. While there is no limit as to the amount of
assets that the Fund may invest in COPs, as of February 28, 1997, the Fund held
the following percentage of its net assets in COPs or other municipal leases:
Alabama Fund 1.29%
Florida Fund 5.35%
Georgia Fund 4.22%
Kentucky Fund 18.87%
Louisiana Fund 2.83%
Maryland Fund 14.80%
Missouri Fund 24.57%
North Carolina
Fund 11.96%
Texas Fund -
Virginia Fund 2.90%
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 that affect the market as a whole.
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.
NON-DIVERSIFICATION RISK - MARYLAND FUND ONLY. The Maryland Fund is a
non-diversified series of the Trust. Under the federal securities laws, this
means the Fund is not subject to any restrictions on the amount of its assets
that it may invest in one or more issuers. An investment in the Fund may involve
more risk than an investment in a fund that may not concentrate its investments
in one or relatively few issuers. These risks include increased susceptiblity to
adverse economic or regulatory developments. Please see "Investment
Restrictions" in the SAI for the diversification requirements the Fund intends
to meet in order to qualify as a regulated investment company under the Code.
STATE RISK FACTORS. Since the Fund primarily invests in municipal securities
issued by or on behalf of its respective state, and that state's local
governments, municipalities, authorities, agencies and political subdivisions,
its performance is closely tied to the continuing ability of issuers of
municipal securities in its respective state to meet their debt obligations and
to the economic and political conditions within the state. Although the Fund's
policy of investing in investment grade securities may reduce the credit and
other risks that may exist on the municipal securities of the Fund's respective
state, it does not eliminate them. Before investing you should consider the
risks discussed in this prospectus. For more information about the economy of
the Fund's respective state and the Fund's potential risks, please see "State
Risk Factors" in the Appendix at the back of this prospectus and the SAI.
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
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. 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. Together, Advisers and its
affiliates manage over $191 billion in assets, including $44 billion in the
municipal securities market. Please see "Investment Management 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 TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is the Director of Franklin's Municipal Bond Department and has been
responsible for portfolio recommendations and decisions of all series of the
Trust since August 1994. 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 the
Franklin Templeton Group 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, Georgia and Maryland Funds since 1990, the North Carolina Fund
since 1992, and the Florida Fund since 1994. He holds a Bachelor of Science
degree in Finance from San Francisco State University. Mr. Pomeroy joined the
Franklin Templeton Group in 1986. He is a member of several securities
industry-related committees and associations.
Stella Wong
Vice President of Advisers
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Louisiana, North Carolina, Texas and Virginia Funds since their inception,
and the Alabama and Maryland Funds since 1990. Ms. Wong holds a Master degree in
Financial Planning from Golden Gate University and a Bachelor of Science degree
in Business Administration from San Francisco State University. She joined the
Franklin Templeton Group in 1986. She is a member of several securities
industry-related committees and associations.
John Wiley
Portfolio Manager of Advisers
Mr. Wiley has been responsible for portfolio recommendations and decisions of
the Louisiana and Texas Funds since 1997. Mr. Wiley holds a Masters of Business
Administration degree in Finance from Saint Mary's College. He earned his
Bachelor of Science degree from University of California at Berkeley. He joined
the Franklin Templeton Group in 1989. He is a member of several securities
industry-related committees and associations.
Robert Schubert
Vice President of Advisers
Mr. Schubert has been responsible for portfolio recommendations and decisions of
the Georgia Fund since 1995. He attended Farleigh Dickenson University and has
been in the securities industry since 1960. He joined the Franklin Templeton
Group in 1989. Before joining the Franklin Templeton Group, he managed the bond
department for First Equity Corporation of Florida. He is a member of several
securites industy-related associations.
Don Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Missouri and Virginia Funds 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 with the Franklin
Templeton Group since 1986. He is a member of several industry-related
committees and associations.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Florida, Kentucky and Missouri Funds since their inception. Ms. Amoroso
holds a Bachelor of Science degree from San Francisco State University. She
joined the Franklin Templeton Group 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. Mr. Schroer holds a Bachelor of Arts
degree in Finance from Santa Clara University. He has been with the Franklin
Templeton Group since 1987. He is a member of several municipal securities
industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1997, management fees
paid to Advisers, as a percentage of average monthly net assets, and total
operating expenses of Class I and Class II were as follows:
TOTAL
OPERATING EXPENSES
MANAGEMENT -------------------
FEES CLASS I CLASS II
- -------------------------------------------------------------------------------
Alabama Fund 0.57% 0.71% 1.28%
Florida Fund 0.47% 0.60% 1.17%
Georgia Fund 0.59% 0.75% 1.32%
Kentucky Fund 0.16%* 0.34%* -
Louisiana Fund 0.61% 0.76% 1.33%
Maryland Fund 0.57% 0.73% 1.27%
Missouri Fund 0.55% 0.70% 1.27%
North Carolina Fund 0.55% 0.70% 1.26%
Texas Fund 0.60% 0.75% 1.32%
Virginia Fund 0.54% 0.69% 1.25%
*Management fees, before any advance waiver, totaled 0.63% and total operating
expenses were 0.81%. Under an agreement by Advisers to limit its fees, the
Kentucky Fund paid the management fees and total operating expenses shown.
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, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
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. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
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 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 are usually calculated using
the maximum sales charges, but certain figures may not include sales charges.
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 received by the
Fund. 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 guarantee 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.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and 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 generally not be liable for federal
income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends are derived from interest income exempt from regular
federal income tax, and are not subject to regular federal income tax for you.
In addition, to the extent that exempt-interest dividends are derived from
interest on obligations of your state of residence or it's political
subdivisions, from interest on direct obligations of the federal government, or
from interest on U.S. territorial obligations, including Puerto Rico, the U.S.
Virgin Islands or Guam, they may also be exempt from personal income tax, if
any, in your 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 such market discount
exceeds a de minimis amount. For obligations purchased after April 30, 1993, a
portion of the gain (not to exceed the accrued portion of market discount as of
the time of sale or disposition) is treated as ordinary income rather than
capital gain. Any distribution by the Fund of such market discount income will
be taxable as ordinary income. In any fiscal year, the Fund may elect not to
distribute 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from long-term capital gain will be taxable to you as
long-term capital gain, regardless of the length of time you have owned Fund
shares and regardless of whether such distributions are received in cash or in
additional shares.
Redemptions and exchanges of Fund shares are taxable events on which 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 disallowed to the extent of any
exempt-interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares will
be disallowed to the extent that you buy other shares in the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to the tax
basis that you receive in the purchase of your new 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 is eligible for the corporate dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that is taxable income or interest income that is a tax preference item under
the federal alternative minimum tax. If you have not held shares of the Fund for
a full calendar year, you may have designated as tax-exempt or as tax preference
income a percentage of income that is not equal to the actual amount of
tax-exempt or tax preference income earned during the period of your investment
in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and, in
some states, state alternative minimum taxes. Corporate shareholders are subject
to special rules.
Consistent with its investment objectives, the Fund may buy private activity
bonds if, in Advisers' opinion, the bonds represent the most attractive
investment opportunity then available to the Fund. For the fiscal year ended
February 28, 1997, the Fund derived the following percentage of its income from
bonds, the interest on which is a preference item subject to the federal
alternative minimum tax for certain investors:
Alabama Fund 8.61%
Florida Fund 9.80%
Georgia Fund 7.49%
Kentucky Fund 12.32%
Louisiana Fund 12.19%
Maryland Fund 10.94%
Missouri Fund 9.44%
North
Carolina Fund 10.62%
Texas Fund 12.49%
Virginia Fund 6.32%
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, are includible in the tax base for determining the extent to which a
shareholder's social security or railroad retirement benefits will be subject to
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 (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult with your personal tax advisor on the deductibility of this
interest.
If you are not considered a U.S. person for federal income tax purposes, 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 the income is distributed
to shareholders of a mutual fund. Generally, individual shareholders of the Fund
are afforded tax-exempt treatment at the state level for distributions derived
from municipal securities of their state of residency. For some investors, a
portion of this income may be subject to state alternative minimum tax.
You should consult your tax advisor to determine the applicability of state or
local income or intangible property taxes to your investment in the Fund or to
distributions or redemption proceeds received from the Fund.
For more information on state income taxes, please see "Appendices - State Tax
Treatment" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Maryland Fund is a non-diversified series of the Trust. The remaining Funds
are diversified series of the Trust, an open-end management investment company,
commonly called a mutual fund. It was organized as a Massachusetts business
trust in September 1984, and is registered with the SEC. Except for the Kentucky
Fund, the Funds offer two classes of shares: Franklin Alabama Tax-Free Income
Fund - Class I, Franklin Florida Tax-Free Income Fund - Class I, Franklin
Georgia Tax-Free Income Fund - Class I, Franklin Louisiana Tax-Free Income Fund
- - Class I, Franklin Maryland Tax-Free Income Fund - Class I, Franklin Missouri
Tax-Free Income Fund - Class I, Franklin North Carolina Tax-Free Income Fund -
Class I, Franklin Texas Tax-Free Income Fund - Class I, Franklin Virginia
Tax-Free Income Fund - Class I and Franklin Alabama Tax-Free Income Fund - Class
II, Franklin Florida Tax-Free Income Fund - Class II, Franklin Georgia Tax-Free
Income Fund - Class II, Franklin Louisiana Tax-Free Income Fund - Class II,
Franklin Maryland Tax-Free Income Fund - Class II, Franklin Missouri Tax-Free
Income Fund - Class II, Franklin North Carolina Tax-Free Income Fund - Class II,
Franklin Texas Tax-Free Income Fund - Class II, Franklin Virginia Tax-Free
Income Fund - Class II. All shares outstanding before the offering of Class II
shares, and all shares of the Kentucky Fund, are considered Class I shares.
Additional series and 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 any 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 affecting only that class, or expressly required
to be voted on separately by state or federal law. 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.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
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.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
- ------------------------------------------------------------
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares.
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
AS A PERCENTAGE OF AMOUNT PAID
AMOUNT OF PURCHASE --------------------- TO DEALER AS A
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." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers 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
o 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, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
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 a 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 Franklin Templeton Fund sales and other 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 front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. 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.
The Fund's sales charges do 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:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (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, the 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 considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
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.
The Fund's sales charges also do not apply to Class I purchases by:
4. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million 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.
5. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
7. Registered Securities Dealers and their affiliates, for their investment
accounts only
8. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
9. 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
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
11. Accounts managed by the Franklin Templeton Group
12. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested.
3. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on behalf
of clients participating in comprehensive fee programs - up to 0.25% of
the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment 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, its investment objective
and policies, 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 want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
o If you do not want the ability to exchange by phone
to apply to your account, 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, for example, 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
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("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, except as noted below.
o The accounts must be identically registered. You may, however, 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. ADDITIONAL PROCEDURES MAY APPLY.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into 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, operations and
shareholders, we may refuse any exchange purchase 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
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. If you would like your redemption
proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the
bank here you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
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 other requirements.
- --------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like
your redemption proceeds wired to a bank account, other than
an escrow account, you must first sign up for the wire feature.
To sign up, send us written instructions, with a signature
guarantee. To avoid any delay in processing, the
instructions should include the items listed in "By Mail"
above.
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 15 days
o If you do not want the ability to redeem by phone to apply
to your account, please let us know.
- -------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ----------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares 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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a STATED DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated 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 on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem 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 redeemed annually free of
charge.
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 20th 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 Class I and Class II.
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 - Class I
Only" 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 before the reinvestment date
for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
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.
The Net Asset Value we use when you buy or sell shares is the one 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 your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
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 are 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 an agent, not 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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the 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 us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept
instructions 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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 - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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 - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of 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(R) 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 for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
FUND CLASS I CLASS II
- -----------------------------------------------------------------------------
ALABAMA FUND 164 264
FLORIDA FUND 165 265
GEORGIA FUND 128 228
KENTUCKY FUND 172 -
LOUISIANA FUND 168 268
MISSOURI FUND 160 260
NORTH CAROLINA
FUND 170 270
TEXAS FUND 162 262
VIRGINIA FUND 163 263
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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)
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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 Plan Services 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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
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 - Each Fund, except the Kentucky 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. Shares of the Kentucky
Fund are considered Class I shares for redemption, exchange and other purposes.
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.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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
NYSE - New York Stock Exchange
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.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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
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 other wholly owned
subsidiaries of Resources.
APPENDIX
STATE RISK FACTORS
The information provided below is based on information from independent
municipal credit reports and other historically reliable information available
to the Fund as of the date of this prospectus. It is not a complete analysis of
every material fact that may affect the ability of issuers of municipal
securities in the Fund's respective state to meet their debt obligations or the
economic or political conditions within the state. The information has not been
independently verified by the Fund. For more information about the economy of
the Fund's respective state, please see "Appendices - State Risk Factors" in the
SAI.
ALABAMA
Alabama's economic base has continued to expand and diversify. Although
manufacturing has remained an important part of the economy, the trade and
service sectors have supplied almost 75% of the state's recent job growth. The
state's economic diversification has been fueled by growth in high tech
industries, health care, and business services and has been centered around the
state's major metropolitan areas. An aggressive economic development and
business recruitment policy adopted in 1993 has helped to increase growth
throughout the state. Over the past several years, companies have announced
approximately $9 billion in new capital investments within Alabama. These
investments may help to offset the state's losses in its textile, apparel and
food processing sectors.
Historically, Alabama has been able to maintain a relatively low overall debt
burden, as well as balanced financial operations. Over the past two years,
unemployment has been close to national levels, while personal income growth has
exceeded the national average. On a per capita basis, however, personal income
in Alabama has remained below the national average by approximately 17.5%.
Over the next couple of years, employment growth is expected to be moderate,
averaging about 1.5% annually. Moderate growth in the service, trade and durable
manufacturing sectors may be partially offset by low growth in the state's low
wage industries, which have continued to decline due to increased international
competition.
FLORIDA
Employment and population have grown steadily in Florida since 1991, and
Florida's economic expansion has been among the strongest in the region, as well
as the nation. As a result, in April 1997, S&P upgraded Florida's general
obligation debt rating from AA to AA+. Other factors S&P considered were the
state's demonstrated financial management strength, steady funding of the budget
stabilization reserve, an economy that continues to diversify, a strong
competitive position in the southeast region, and moderate debt levels.
Florida's population growth has placed increased demands on education,
corrections, and other government services, but so far Florida has been able to
meet these challenges.
GEORGIA
Like other states, Georgia's economy was adversely affected by the recession in
the early 1990s. Recently, however, Georgia's economy has grown rapidly, often
outperforming the national economy. While this growth has slowed substantially
since the end of the 1996 Summer Olympics in Atlanta, unemployment rates have
remained low and job growth has continued to exceed the national rate. Many of
the capital improvements made in connection with the Olympic Games should
continue to benefit the state in future years.
The state's fiscal operations have been strong over the past several years, due
in large part to revenue growth that has
exceeded budgeted expectations.
KENTUCKY
Kentucky's economy, with its base in agriculture and traditional manufacturing,
has outperformed the nation in both employment and personal income growth over
the past seven years. In contrast to the nation, its relatively high-wage
manufacturing sector has grown steadily, recently accounting for nearly 15% of
all jobs. The state has been especially dependent on the production of
transportation equipment.
While the state's reliance on traditional manufacturing has persisted, its
economy has made improvements towards diversification. Kentucky's economy has
been moving towards a more modern manufacturing and service-oriented base, with
less emphasis on its coal, tobacco, and heavy manufacturing industries. Its low
cost structure, high quality of living, and pro-business environment have
attracted businesses to the state over the past several years, with the majority
of economic development occurring in the state's "Golden Triangle" region.
Despite improvements, there remain major structural weaknesses in Kentucky's
economic base. The state is especially vulnerable to rapid technological
changes, which, given the historically low education levels of its workforce,
could weaken the ability of the state to remain economically competitive.
LOUISIANA
Louisiana has continued to recover from the energy sector decline of the 1980s.
Relatively stable energy prices, favorable legislation, and technological
changes and improvements have since led to improved performance in the state's
oil and gas industries, which ranked number two nationally in natural gas
production and number three in crude oil production as of March 1997. The
performance of these industries has been important to the state, since one-fifth
of the state's revenues have come from its oil and gas industries in the form of
severance taxes, royalties, rents and bonuses.
Recent employment growth has been more diversified than in the past, somewhat
lessening the state's vulnerability to changes in the oil and gas sector. Job
growth has occurred in the service sector, especially in tourism and gaming, in
manufacturing sectors such as truck manufacturing and defense-related products,
and in the lumber and paper industry. While the economy has become more
diversified than it was in the 1980's, the state's current growth industries are
sensitive to federal defense spending cuts, the impact of foreign competition,
interest rates and the national business cycle. The gaming industry, in
particular, is vulnerable to market saturation and competition from other
states.
Louisiana's debt level has remained relatively high. In 1993, the state
established debt limitations that, together with economic and population growth,
have helped the state reduce the amount of new debt issues. While lower than in
prior years, its debt ratios still exceed the national average. Over time,
however, the state's debt levels are expected to decline.
MARYLAND
Because of its close proximity to Washington D.C., Maryland's economy has been
more dependent on federal spending and government employment than most other
states. Over the past six years, cutbacks in federal spending, especially in
defense programs, have slowed both job and personal income growth. Federal job
losses in Maryland have recently occurred at an annual rate of approximately 1%.
Nonetheless, Maryland's overall economy has been growing, with growth in 1997
estimated at 1.5%. Increases in non-banking financial services, commercial
construction, small high-technology companies and distribution/transportation
activities are expected to account for much of the state's future growth.
Despite slow economic growth, Maryland's financial performance has been strong.
Over the past three years, the state has generated operating surpluses and built
up its reserves. While Maryland remains one of the most heavily indebted states,
due in part to its uncommon practice of borrowing for local school construction
costs, conservative fiscal management and restrained borrowing in recent years
have resulted in a more modest relative debt position.
MISSOURI
Missouri's economic base has been well diversified and has tended to mirror the
national economy. Employment and personal income growth, however, have been
above the national average. Over the past two years, employment has grown at an
average annual rate of 2%, while personal income has increased by an average
annual rate of 5.9%. At the same time, the state's unemployment rate of 4% has
been below the national average.
Despite declines in its manufacturing sector, services, trade, transportation,
computer services and telecommunications have all grown steadily and have more
than offset the state's manufacturing losses. Missouri's low cost of living and
highly skilled workforce have contributed to this growth and have made the state
attractive to computer- and telecommunications-related companies. The state's
largest employer is McDonnellDouglas Corporation, which relies heavily on
defense contracts. This reliance, given current federal spending cuts, creates
some vulnerability in the state's economy.
NORTH CAROLINA
North Carolina's economic growth recently ranked among the top ten states, as
measured by job, population and personal income growth. While unemployment has
been below the national average, the rate of the state's employment growth has
not been as high as national rates. North Carolina's employment growth has been
historically more volatile than that of the U.S. because of the state's
concentration in cyclical manufacturing industries, such as textiles, chemicals
and apparel. Manufacturing recently accounted for 24% of total state employment.
North Carolina's financial operations have been historically sound. The state
has traditionally followed conservative debt issuance policies, which have
resulted in one of the lowest debt ratios among the states.
TEXAS
During the 1980s, the Texas economy was defined by its oil and gas industry. As
a result, the downturn in the energy sector in the 1980s adversely affected the
state's economy and resulted in budget deficits. Since that time, the state's
economy has become more diversified. While construction, manufacturing and
service sectors have grown, the importance of the oil and gas industry within
the state has declined. This decline, however, has dampened income growth as the
relatively high paying jobs in the oil and gas industry have been replaced with
lower paying jobs in the service sector. Overall, economic growth in Texas has
exceeded the national average in recent years, although the state's unemployment
rates remain high due to substantial net migration and a workforce with a high
number of young, first-time workers.
Texas has also been able to recover financially from its 1980s decline. The
state's financial operations have resulted in general fund surpluses over each
of the last five years. The state may face budgetary pressures in the coming
years, however, due to increased expenditures for medical assistance and
education. By the end of fiscal 1997, the state is expected to use up a large
amount of its existing surpluses, which could hamper efforts to maintain
balanced operations going forward.
VIRGINIA
Virginia's economy has remained strong and diversified. In June 1993, Virginia
exceeded its prerecession employment peak and has since sustained moderate
growth. Much of this growth has been driven by the state's services sector,
which accounted for almost 29% of total employment as of October 1996. Despite
defense-related cutbacks and their impact on related manufacturing industries
and the state's shipyards, total employment growth through fiscal 1997 is
expected to average 1.6%, the 14th strongest growth rate among the states.
Virginia's unemployment rate has been one of the lowest in the U.S., while its
per capita personal income has been the highest in the southeast region at 104%
of the national average.
Virginia has generated operating surpluses in three of the past four fiscal
years, with the last deficit occurring in fiscal 1995. Based on estimated fiscal
1996 results, the state was expected to end fiscal 1996 with a positive general
fund balance, eliminating the deficit balance that existed at the end of fiscal
1995.
PROSPECTUS & APPLICATION
FRANKLIN
TAX-FREE
TRUST
- -------------------------------------------------------------------------------
JULY 1, 1997
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
Investment Strategy
TAX-FREE INCOME
This prospectus describes the ten series of the Franklin Tax-Free Trust (the
"Trust") listed above. Each series may individually or together be referred to
as the "Fund(s)." This prospectus contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated July 1, 1997,
which may be amended from time to time. It 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 its
address.
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.
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 Fund. Please see "What are the
Fund's Potential Risks?"
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country 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.
Franklin
Tax-Free
Trust
- ------------------------------------------------------------------------------
July 1, 1997
When reading this prospectus, you will see terms beginning with capital letters.
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? 22
What are the Fund's Potential Risks? 27
Who Manages the Fund? 31
How does the Fund Measure Performance? 35
How Taxation Affects the Fund and its
Shareholders 36
How is the Trust Organized? 39
ABOUT YOUR ACCOUNT
How Do I Buy Shares? 40
May I Exchange Shares for Shares of Another
Fund? 45
How Do I Sell Shares? 48
What Distributions Might I Receive from the
Fund? 51
Transaction Procedures and Special
Requirements 52
Services to Help You Manage Your Account 56
What If I Have Questions About My Account? 59
GLOSSARY
Useful Terms and Definitions 59
Appendices
Description of Ratings 61
State Risk Factors 63
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 28, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
Connec- High New Penn- Puerto
Arizona Colorado ticut Yield Indiana Michigan Jersey Oregon sylvani Rico
Fund Fund Fund Fund Fund Fund* Fund Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------------
A. Shareholder Transaction Expenses+
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum
Sales
Charge
(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%
Paid
at time
of
purchase
++ 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid
at re-
demption
+++ NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
CLASS II
Maximum
Sales
Charge
(as a
percentage
of Offering
Price) 1.99% 1.99% 1.99% 1.99% - - 1.99% 1.99% 1.99% 1.99%
Paid
at time
of purchase
++++ 1.00% 1.00% 1.00% 1.00% - - 1.00% 1.00% 1.00% 1.00%
Paid
at
redemption+++
0.99% 0.99% 0.99% 0.99% - - 0.99% 0.99% 0.99% 0.99%
B. Annual Fund Operating Expenses (as a percentage of average net assets)
CLASS I
Management
Fees 0.48% 0.56% 0.57% 0.46% 0.63% 0.63%** 0.49% 0.52% 0.49% 0.57%
Rule 12b-1
Fees*** 0.08% 0.08% 0.08% 0.09% 0.09% 0.02% 0.08% 0.08% 0.08% 0.08%
Other
Expenses
0.06% 0.07% 0.07% 0.07% 0.10% 0.56% 0.07% 0.06% 0.07% 0.08%
Totall
Fund
Operating
Expenses
0.62% 0.71% 0.72% 0.62% 0.82% 1.21%** 0.64% 0.66% 0.64% 0.73%
Class II
Management
Fees 0.48% 0.56% 0.57% 0.46% - - 0.49% 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
0.06% 0.07% 0.07% 0.07% - - 0.07% 0.06% 0.07% 0.08%
Total
Fund
Operating
Expenses
1.19% 1.28% 1.29% 1.18% - - 1.21% 1.23% 1.21% 1.30%
<CAPTION>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.
Connec- High New Penn- Puerto
Arizona Colorado ticut Yield Indiana Michigan Jersey Oregon sylvania Rico
Fund Fund Fund Fund Fund Fund* Fund Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year****$ 49 $ 49 $ 50 $ 49 $51 $54 $ 49 $ 49 $ 49 $ 50
3 Years $ 62 $ 64 $ 65 $ 62 $ 68 $79 $ 62 $ 63 $ 62 $ 65
5 Years $ 76 $ 80 $ 81 $ 76 $ 86 - $ 77 $ 78 $ 77 $ 81
10 Years $117 $127 $128 $117 $140 - $119 $121 $119 $129
Class II
1 Year $ 32 $ 33 $ 33 $ 32 - - $ 32 $ 32 $ 32 $ 33
3 Years $ 47 $ 50 $ 50 $ 47 - - $ 48 $ 49 $ 48 $ 51
5 Years $ 75 $ 80 $ 80 $ 74 - - $ 76 $ 77 $ 76 $ 81
10 Years $153 $163 $164 $152 - - $155 $157 $155 $165
</TABLE>
For the same Class II investment, you would pay projected expenses of $22 for
the Arizona, High Yield, New Jersey, Oregon and Pennsylvania Funds and $23 for
the Colorado, Connecticut and Puerto Rico Funds 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.
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. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
++++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."
*The operating expenses for the Michigan Fund are annualized.
**For the period shown, Advisers had agreed in advance to waive its management
fees and make certain payments to reduce the Fund's expenses. With this
reduction, the Fund paid no management fees and total operating expenses were
0.34%.
***For the Michigan Fund, these fees may not exceed 0.15%. For the remaining
Funds, these fees may not exceed 0.10% for Class I and 0.65% for Class II. 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.
****Assumes a Contingent Deferred Sales Charge will not apply.
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 28, 1997. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
ARIZONA FUND - CLASS I
Year Ended Feb. 28
- -------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period $11.34 $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37 $10.41 $10.00
--------------------------------------------------------------------------------------
Net
Investment
Income .62 .64 .65 .66 .68 .67 .70 .71 .75 .42
Net
Realized
& Unrealized
Gain (Loss)
on Securities
(.038) .362 (.481) .020 .733 .308 .128 .198 (.040) .170
-------------------------------------------------------------------------------------
Total
From
Investment
Operations
.582 1.002 .169 .680 1.413 .978 .828 .908 .710 .590
======================================================================================
Distributions
From Net
Investment
Income (.636) (.651) (.639) (.670) (.663) (.728) (.768) (.768) (.748) (.180)
Distributions
From
Realized
Capital
Gains (.046) (.121) - - - - - - (.002) -
--------------------------------------------------------------------------------------
Total
Distributions
(.682) (.772) (.639) (.670) (.663) (.728) (.768) (.768) (.750) (.180)
Net
Asset
Value at
End of
Period $11.24** $11.34 $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37 $10.41
=======================================================================================
Total
Return+ 5.33% 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)
$752,335 $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***
.62% .62% .60% .54% .55% .56% .59% .68% .51% -%
Ratio of
Net
Investment
Income to
Average
Net
Assets 5.59% 5.67% 5.86% 5.65% 6.11% 6.37% 6.58% 6.53% 6.58% 6.20%*
Portfolio
Turnover
Rate
16.57% 25.12% 18.65% 14.17% 5.67% 1.56% 4.13% 20.82% 26.64% 24.07%
</TABLE>
ARIZONA FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ------------------------------------------------------------------------------
Per Share Operating Performance
Net Asset Value at Beginning of Period $11.38 $11.15
Net Investment Income .57 .49
Net Realized & Unrealized Gain (Loss) on Securities (.033) .344
Total From Investment Operations .537 .834
Distributions From Net Investment Income (.571) (.483)
Distributions From Realized Capital Gains (.046) (.121)
Total Distributions (.617) (.604)
Net Asset Value at End of Period $11.30 $11.38
Total Return+ 4.89% 7.60%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $5,486 $1,892
Ratio of Expenses to Average Net Assets 1.19% 1.20%*
Ratio of Net Investment Income to Average Net Assets 5.01% 5.05%*
Portfolio Turnover Rate 16.57% 25.12%
<TABLE>
<CAPTION>
COLORADO FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- --------------------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Asset
Value at
Beginning
of Period
$11.84 $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53 $10.40 $10.00
----------------------------------------------------------------------------------------
Net
Investment
Income .66 .67 .67 .68 .70 .68 .70 .73 .79 .46
Net Realized
& Unrealized
Gain (Loss)
on Securities
(.039) .453 (.568) .100 .845 .361 .056 .196 .076 .117
-------------------------------------------------------------------------------------------
Total
From
Investment
Operations
.621 1.123 .102 .780 1.545 1.041 .756 .926 .866 .577
===========================================================================================
Distributions
From Net
Investment
Income
(.661) (.663) (.662) (.690) (.695) (.741) (.756) (.756) (.736) (.177)
Distributions
From
Capital Gains
- - - - - - - - - -
--------------------------------------------------------------------------------------------
Total
Distributions
(.661) (.663) (.662) (.690) (.695) (.741) (.756) (.756) (.736) (.177)
Net Asset
Value at
End of
Period $11.80 $11.84 $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53 $10.40
===========================================================================================
Total Return+
5.44% 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)
$236,609 $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***
.71% .71% .70% .64% .67% .70% .74% .56% -% -%
Ratio of
Net
Investment
Income to
Average Net
Assets 5.59% 5.73% 5.94% 5.69% 6.20% 6.44% 6.54% 6.63% 7.25% 6.91%*
Portfolio
Turnover
Rate 14.13% 17.58% 28.83% 10.85% 5.66% 21.46% 17.72% .82% 7.83% 22.46%
</TABLE>
COLORADO FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.87 $11.40
-------------------
Net Investment Income .59 .50
Net Realized & Unrealized Gain (Loss) on Securities (.024) .461
---------------------
Total From Investment Operations .566 .961
=====================
Distributions From Net Investment Income (.596) (.491)
Distributions From Realized Capital Gains - -
---------------------
Total Distributions (.596) (.491)
Net Asset Value at End of Period $11.84 $11.87
====================
Total Return+ 4.93% 8.57%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $5,654 $1,656
Ratio of Expenses to Average Net Assets 1.28% 1.29%*
Ratio of Net Investment Income to Average Net Assets 4.99% 5.12%*
Portfolio Turnover Rate 14.13% 17.58%
<TABLE>
<CAPTION>
CONNECTICUT FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 19893
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period
$10.96 $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16 $10.00
--------------------------------------------------------------------------------------
Net Investment
Income .61 .62 .62 .62 .64 .62 .64 .70 .20
Net Realized & Unrealized
Gain (Loss) on Securities
(.025) .319 (.597) .080 .664 .211 .024 .184 .017
--------------------------------------------------------------------------------------
Total From
Investment
Operations
.585 .939 .023 .700 1.304 .831 .664 .884 .217
=====================================================================================
Distributions From
Net Investment
Income
(.625) (.619) (.613) (.630) (.634) (.681) (.684) (.684) (.057)
Distributions
From Realized
Capital
Gains - - - - - - - - -
--------------------------------------------------------------------------------------
Total
Distributions
(.625) (.619) (.613) (.630) (.634) (.681) (.684) (.684) (.057)
Net Asset
Value at
End of
Period $10.92 $10.96 $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16
===================================================================================
Total
Return+ 5.52% 9.04% .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)
$183,649 $167,045 $155,623 $163,050$126,816 $88,184 $48,035 $22,793 $5,637
Ratio of
Expenses
to Average
Net Assets***
.72% .73% .71% .65% .69% .71% .71% .36% -%
Ratio of Net
Investment
Income to
Average Net
Assets 5.62% 5.70% 5.83% 5.54% 5.97% 6.11% 6.10% 6.37% 4.68%*
Portfolio Turnover
Rate 14.53% 3.88% 75.72% 5.54% 28.52% 28.28% 8.65% 3.69% 5.21%
</TABLE>
CONNECTICUT FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.97 $10.65
-------------------
Net Investment Income .60 .47
Net Realized & Unrealized Gain (Loss) on Securities (.066) .312
-------------------
Total From Investment Operations .529 .782
===================
Distributions From Net Investment Income (.564) (.462)
Distributions From Realized Capital Gains - -
------------------
Total Distributions (.564) (.462)
Net Asset Value at End of Period $10.94 $10.97
================
Total Return+ 5.03% 7.45%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $4,149 $1,656
Ratio of Expenses to Average Net Assets 1.29% 1.30%*
Ratio of Net Investment Income to Average Net Assets 5.01% 5.12%*
Portfolio Turnover Rate 14.53% 3.88%
<TABLE>
<CAPTION>
INDIANA FUND
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ---------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at Beginning
of Period
$11.76 $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49 $10.47 $10.00
------------------------------------------------------------------------------------------
Net Investment
Income .66 .67 .66 .68 .71 .69 .74 .80 .79 .45
Net Realized &
Unrealized
Gain (Loss)
on Securities
.011 .350 (.608) .108 .828 .325 .096 .236 (.014) (.209)
-----------------------------------------------------------------------------------------
Total From
Investment
Operations
.671 1.020 .052 .788 1.538 1.015 .836 1.036 .776 .659
==========================================================================================
Distributions From
Net Investment
Income (.661) (.660) (.662) (.678) (.708) (.775) (.776) (.756) (.756) (.189)
Distributions
From Realized
Capital Gains
- - - - - - - - - -
-------------------------------------------------------------------------------------------
Total
Distributions
(.661) (.660) (.662) (.678) (.708) (.775) (.776) (.756) (.756) (.189)
Net Asset
Value at
End of
Period $11.77 $11.76 $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49 $10.47
===========================================================================================
Total Return+
5.91% 9.20% .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)
$51,137 $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***
.82% .80% .81% .71% .59% .50% .51% .06% -% -%
Ratio of Net
Investment
Income to
Average Net
Assets 5.69% 5.80% 5.84% 5.62% 6.16% 6.60% 6.91% 7.34% 7.41% 6.70%*
Portfolio
Turnover
Rate 23.54% 10.56% 26.49% 16.12% 7.98% .03% 24.60% .06% 10.67% -%
</TABLE>
MICHIGAN FUND
Year Ended Feb. 28 19974
- ----------------------------------------------------------------------------
Net Asset Value at Beginning of Period $10.00
-----------------
Net Investment Income .30
Net Realized & Unrealized Gain (Loss) on Securities .315
-----------------
Total From Investment Operations .615
=================
Distributions From Net Investment Income (.195)
Distributions From Realized Capital Gains -
Total Distributions (.195)
-----------------
Net Asset Value at End of Period $10.42
=================
Total Return+ 6.17%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $3,884
Ratio of Expenses to Average Net Assets*** .34%*
Ratio of Net Investment Income to Average Net Assets 4.90%*
Portfolio Turnover Rate 42.83%
<TABLE>
<CAPTION>
NEW JERSEY FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 19895
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value
at Beginning
of Period
$11.68 $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52 $10.00
--------------------------------------------------------------------------------
Net Investment
Income .64 .65 .66 .67 .69 .68 .69 .71 .58
Net Realized
& Unrealized
Gain (Loss)
on
Securities
(.063) .389 (.550) (.016) .694 .348 .238 .230 .317
-----------------------------------------------------------------------------------
Total From
Investment
Operations
.577 1.039 .110 .654 1.384 1.028 .928 .940 .897
==================================================================================
Distributions
From Net
Investment
Income (.647) (.639) (.650) (.684) (.688) (.708) (.768) (.780) (.375)
Distributions
From
Realized
Capital
Gains - - - - (.006) - - - (.002)
--------------------------------------------------------------------------------------
Total
Distributions
(.647) (.639) (.650) (.684) (.694) (.708) (.768) (.780) (.377)
Net Asse
Value at
End of
Period $11.61 $11.68 $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52
================================================================================
Total
Return+ 5.13% 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)
$574,691 $564,864 $533,937 $561,130 $433,702$332,536 $258,514 $99,299 $19,973
Ratio of
Expenses
to Average
Net Assets***
.64% .65% .63% .57% .59% .60% .65% .73% .25%
Ratio of
Net Investment
Income to Average
Net
Assets 5.58% 5.65% 5.86% 5.60% 6.06% 6.30% 6.40% 6.41% 6.09%*
Portfolio
Turnover
Rate 8.87% 12.04% 31.05% 4.16% 14.12% 3.66% 1.84% 10.86% 7.44%
</TABLE>
NEW JERSEY FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.72 $11.30
----------------------
Net Investment Income .57 .49
Net Realized & Unrealized Gain (Loss) on Securities (.053) .403
-----------------------
Total From Investment Operations .517 .893
=======================
Distributions From Net Investment Income (.577) (.473)
Distributions From Realized Capital Gains - -
----------------------
Total Distributions (.577) (.473)
Net Asset Value at End of Period $11.66 $11.72
=======================
Total Return+ 4.57% 8.02%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $13,095 $4,542
Ratio of Expenses to Average Net Assets 1.21% 1.23%*
Ratio of Net Investment Income to Average Net Assets 5.01% 5.15%*
Portfolio Turnover Rate 8.87% 12.04%
<TABLE>
<CAPTION>
OREGON FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 19881
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value at
Beginning
of Period $11.60 $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44 $10.37 $10.00
-----------------------------------------------------------------------------------------
Net
Investment
Income .63 .63 .63 .64 .66 .63 .68 .69 .72 .44
Net Realized
& Unrealized
Gain (Loss)
on Securities
(.055) .377 (.493) (.021) .702 .384 .148 .165 .046 .046
---------------------------------------------------------------------------------------
Total From
Investment
Operations
.575 1.007 .137 .619 1.362 1.014 .828 .855 .766 .486
=======================================================================================
Distributions
From Net
Investment
Income (.625) (.627) (.617) (.649) (.652) (.704) (.708) (.705) (.696) (.116)
Distributions
From Realized
Capital Gains
- - - - - - - - - -
---------------------------------------------------------------------------------------
Total
Distributions
(.625) (.627) (.617) (.649) (.652) (.704) (.708) (.705) (.696) (.116)
Net Asset
Value at
End of Period
$11.55 $11.60 $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44 $10.37
==========================================================================================
Total
Return+ 5.13% 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)
$384,003 $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***
.66% .66% .65% .58% .62% .65% .70% .70% .45% -%
Ratio of
Net
Investment
Income to
Average
Net Assets
5.52% 5.51% 5.71% 5.47% 5.87% 6.09% 6.40% 6.28% 6.72% 6.16%*
Portfolio
Turnover
Rate 4.47% 6.52% 26.44% 9.42% 7.78% 4.65% 10.74% 12.58% 15.08% 14.49%
</TABLE>
OREGON FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.65 $11.23
----------------------
Net Investment Income .56 .47
Net Realized & Unrealized Gain (Loss) on Securities (.042) .414
---------------------
Total From Investment Operations .518 .884
====================
Distributions From Net Investment Income (.558) (.464)
Distributions From Realized Capital Gains - -
--------------------
Total Distributions (.558) (.464)
Net Asset Value at End of Period $11.61 $11.65
======================
Total Return+ 4.59% 7.99%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $7,100 $2,044
Ratio of Expenses to Average Net Assets 1.23% 1.24%*
Ratio of Net Investment Income to Average Net Asset 4.93% 4.87%*
Portfolio Turnover Rate 4.47% 6.52%
<TABLE>
<CAPTION>
PENNSYLVANIA FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period $10.44 $10.16 $10.56 $10.55 $ 9.84 $ 9.49 $ 9.65 $ 9.52 $ 9.49 $10.23
---------------------------------------------------------------------------------------
Net
Investment
Income .60 .62 .62 .63 .64 .64 .65 .66 .69 .72
Net Realized
& Unrealized
Gain (Loss)
on
Securities
(.044) .287 (.406) .014 .703 .380 (.090) .190 .060 (.799)
---------------------------------------------------------------------------------------------
Total
From
Investment
Operations
.559 .907 .214 .644 1.343 1.020 .560 .850 .750 (.079)
================================================================================================
Distributions
From Net
Investment
Income (.606) (.627) (.614) (.634) (.633) (.670) (.720) (.720) (.720) (.660)
Distributions
From Realized
Capital
Gains - - - - - - - - - (.001)
--------------------------------------------------------------------------------------------------
Total
Distributions
(.606) (.627) (.614) (.634) (.633) (.670) (.720) (.720) (.720) (.661)
Net
Asset
Value
at End
of Period
$10.39 $10.44 $10.16 $10.56 $10.55 $ 9.84 $ 9.49 $ 9.65 $ 9.52 $ 9.49
==================================================================================================
Total
Return+ 5.53% 9.15% 2.22% 5.99% 13.84% 10.99% 5.76% 8.86% 7.97% (.53)%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End of
Period (in 000's)
$658,339 $639,847 $587,366 $615,546 $505,845 $391,301 $305,592 $180,720 $73,851 $20,663
Ratio of
Expenses
to Average
Net Assets***
.64% .64% .63% .56% .58% .59% .62% .73% .59% .24%
Ratio of Net
Investment
Income to
Average Net
Assets 5.84% 5.96% 6.15% 5.90% 6.34% 6.71% 6.82% 6.66% 6.97% 7.21%
Portfolio
Turnover
Rate 22.24% 9.71% 12.91% 4.73% 5.87% 4.44% 5.23% 6.31% 1.56% 18.69%
</TABLE>
PENNSYLVANIA FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.47 $10.17
------------------
Net Investment Income .55 .47
Net Realized & Unrealized Gain (Loss) on Securities (.047) .302
------------------
Total From Investment Operations .503 .772
===================
Distributions From Net Investment Income (.543) (.472)
Distributions From Realized Capital Gains - -
-------------------
Total Distributions (.543) (.472)
Net Asset Value at End of Period $10.43 $10.47
===================
Total Return+ 4.98% 7.71%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $11,935 $3,110
Ratio of Expenses to Average Net Assets 1.21% 1.22%*
Ratio of Net Investment Income to Average Net Assets 5.22% 5.36%*
Portfolio Turnover Rate 22.24% 9.71%
<TABLE>
<CAPTION>
PUERTO RICO FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of
Period $11.59 $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54 $10.57 $11.29
------------------------------------------------------------------------------------------
Net Investment
Income .65 .66 .67 .68 .70 .69 .76 .71 .70 .72
Net Realized
& Unrealized
Gain (Loss)
on Securities
.025 .299 (.504) .034 .673 .301 .040 .235 .042 (.588)
--------------------------------------------------------------------------------------------
Total
From
Investment
Operations
.675 .959 .166 .714 1.373 .991 .800 .945 .742 .132
============================================================================================
Distributions
From Net
Investment
Income
(.651)+++ (.669)++ (.686) (.694) (.683) (.711) (.720) (.725) (.772) (.852)
Distributions
From Realized
Capital Gains
(.104) (.010) - - - - - - - -
---------------------------------------------------------------------------------------------
Total
Distributions
(.755) (.679) (.686) (.694) (.683) (.711) (.720) (.725) (.772) (.852)
Net Asset Value
at End of Period
$11.51 $11.59 $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54 $10.57
===============================================================================================
Total Return+
6.03% 8.68% 1.60% 5.95% 12.48% 9.31% 7.45% 8.91% 7.06% 1.29%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End of
Period
(in 000's)
$192,525 $190,577 $176,888 $175,036$144,806 $112,714 $91,601 $82,819 $80,431 $66,598
Ratio of
Expenses
to Average
Net Assets
.73% .74% .73% .66% .69% .70% .70% .70% .72% .75%
Ratio of
Net Investmen
t Income to
Average
Net Assets
5.62% 5.71% 5.95% 5.77% 6.18% 6.45% 7.08% 6.65% 6.76% 6.67%
Portfolio
Turnover
Rate 21.09% 27.99% 18.30% 5.10% 10.37% 15.01% 6.09% 14.12% 50.57% 41.98%
</TABLE>
PUERTO RICO FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.62 $11.32
-------------------
Net Investment Income .58 .50
Net Realized & Unrealized Gain (Loss) on Securities .020 .304
------------------
Total From Investment Operations .600 .804
==================
Distributions From Net Investment Income (.586) (.494)
Distributions From Realized Capital Gains (.104) (.010)
-------------------
Total Distributions (.690) (.504)
Net Asset Value at End of Period $11.53 $11.62
==================
Total Return+ 5.33% 7.21%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $1,679 $533
Ratio of Expenses to Average Net Assets 1.30% 1.32%*
Ratio of Net Investment Income to Average Net Assets 5.04% 5.16%*
Portfolio Turnover Rate 21.09% 27.99%
<TABLE>
<CAPTION>
HIGH YIELD FUND - CLASS I
Year Ended Feb. 28
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
at Beginning
of Period
$11.19 $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50 $10.34 $10.70
------------------------------------------------------------------------------------------
Net
Investment
Income .71 .74 .74 .76 .79 .78 .82 .81 .79 1.00
Net Realized
& Unrealized
Gain (Loss)
on Securities
.043 .446 (.509) .169 .624 .230 (.210) .120 .240 (.409)
------------------------------------------------------------------------------------------
Total From
Investment
Operations
.753 1.186 .231 .929 1.414 1.010 .610 .930 1.030 .591
===========================================================================================
Distributions
From Net
Investment
Income
(.733)++++ (.736) (.741) (.779) (.784) (.840) (.840) (.890) (.870) (.951)
Distributions
From Realized
Capital
Gains - - - - (.010) - - - - -
--------------------------------------------------------------------------------------------
Total
Distributions
(.733) (.736) (.741) (.779) (.794) (.840) (.840) (.890) (.870) (.951)
Net Asset
Value at End
of Period $11.21** $11.19 $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50 $10.34
=============================================================================================
Total
Return+ 7.01% 11.35% 2.28% 8.33% 13.72% 9.97% 5.71% 8.80% 10.87% 5.70%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End of
Period
(in 000's)
$4,505,258$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
Ratio of
Expenses to
Average Ne
t Assets .62% .61% .60% .53% .54% .53% .52% .54% .61% .65%
Ratio of Net
Investmen
t Income to
Average
Net
Assets 6.41% 6.68% 6.92% 6.79% 7.45% 7.73% 7.90% 7.52% 7.68% 7.79%
Portfolio Turnover
Rate 6.98% 9.23% 15.89% 16.09% 33.46% 102.57% 70.60% 23.41% 2.02% 26.65%
</TABLE>
HIGH YIELD FUND - CLASS II
Year Ended Feb. 28 1997 19962
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $11.24 $10.81
-----------------
Net Investment Income .66 .56
Net Realized & Unrealized Gain (Loss) on Securities .028 .423
------------------
Total From Investment Operations .688 .983
==================
Distributions From Net Investment Income (.668)++++ (.553)
Distributions From Realized Capital Gains - -
------------------
Total Distributions (.668) (.553)
Net Asset Value at End of Period $11.26 $11.24
===================
Total Return+ 6.36% 9.27%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $194,400 $48,163
Ratio of Expenses to Average Net Assets 1.18% 1.18%*
Ratio of Net Investment Income to Average Net Assets 5.78% 6.07%*
Portfolio Turnover Rate 6.98% 9.23%
1FOR THE PERIOD SEPTEMBER 1, 1987 (EFFECTIVE DATE) TO FEBRUARY 29, 1988.
2FOR THE PERIOD MAY 1, 1995 TO FEBRUARY 29, 1996.
3FOR THE PERIOD OCTOBER 3, 1988 (EFFECTIVE DATE) TO FEBRUARY 28, 1989.
4FOR THE PERIOD JULY 1, 1996 (EFFECTIVE DATE) TO FEBRUARY 28, 1997.
5FOR THE PERIOD APRIL 23, 1988 (EFFECTIVE DATE) TO FEBRUARY 28, 1989.
+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 AT NET ASSET VALUE. BEFORE
MAY 1, 1994, DIVIDENDS WERE REINVESTED AT THE MAXIMUM OFFERING PRICE AND CAPITAL
GAINS AT NET ASSET VALUE. EFFECTIVE MAY 1, 1994, WITH THE IMPLEMENTATION OF THE
RULE 12B-1 DISTRIBUTION PLAN FOR CLASS I SHARES, THE SALES CHARGES ON REINVESTED
DIVIDENDS WERE ELIMINATED.
++INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$0.001.
+++INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$0.006.
++++INCLUDES DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME IN THE AMOUNT OF
$0.008 FOR CLASS I AND $0.003 FOR CLASS II.
*ANNUALIZED.
**THE NET ASSET VALUE DIFFERS FROM THE NET ASSET VALUE USED TO PROCESS
SHAREHOLDER ACTIVITY AS OF THE REPORTING DATE, WHICH DOES NOT INCLUDE MARKET
ADJUSTMENTS FOR PORTFOLIO TRADES MADE ON THAT DATE. THESE ADJUSTMENTS ARE
GENERALLY ACCOUNTED FOR ON THE DAY FOLLOWING THE TRADE DATE.
***FOR THE PERIODS INDICATED, THE INVESTMENT MANAGER AGREED IN ADVANCE TO LIMIT
ITS MANAGEMENT FEES AND TO MAKE CERTAIN PAYMENTS TO REDUCE EXPENSES OF THE FUNDS
LISTED BELOW. 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
- -----------------------------------------------------------
ARIZONA FUND
1989 0.73%
COLORADO FUND
1989 0.74%
1990 0.72
CONNECTICUT FUND
19893 0.65%*
1990 0.72
1991 0.72
INDIANA FUND
1989 0.77%
1990 0.70
1991 0.74
1992 0.74
1993 0.73
MICHIGAN FUND
19974 1.21%*
NEW JERSEY FUND
19895 0.66%*
OREGON FUND
1989 0.73%
PENNSYLVANIA FUND
1989 0.75%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of each Fund, except the Puerto Rico and High Yield
Funds, is 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. The Puerto Rico Fund's investment
objective is to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing while seeking
preservation of shareholders' capital. The High Yield Fund's investment
objective is to provide investors with a high current yield exempt from federal
income taxes. As a secondary objective, the High Yield Fund seeks capital
appreciation to the extent possible and consistent with its principal investment
objective. The objective is a fundamental policy of each Fund and may not be
changed without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
As a nonfundamental policy, the Puerto Rico Fund also 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 before investing in any of the Funds.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The 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, including the alternative minimum tax. Each Fund,
except the Puerto Rico and High Yield Funds, also 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 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.
Each Fund, except the High Yield Fund, invests at least 65% of its total assets
in municipal securities issued by or on behalf of its respective state or
territory, and that state's or territory's local governments, municipalities,
authorities, agencies and political subdivisions. It is possible, although not
anticipated, that up to 35% of the Fund's total assets could be in municipal
securities of a state, territory or local government other than its respective
state or territory. The High Yield Fund invests at least 65% of its assets in
high yield securities. The High Yield Fund is diversified nationally and will
not invest more than 25% of its net assets in the municipal securities of any
one state or territory.
Some states may require a fund to invest a certain amount of its assets in
securities of that state, or in securities that are otherwise tax-exempt under
the laws of that state, in order for any portion of the fund's distributions to
be exempt from the state's personal income taxes. If the Fund's respective state
requires this, the Fund will attempt to invest its assets as required so that
its distributions will be exempt from personal income taxes for resident
shareholders of that state.
As a fundamental policy, the Pennsylvania Fund invests in securities for income
earnings rather than trading for profit. The Fund does 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, except the High Yield Fund, invests in investment grade securities.
Investment grade securities are securities rated in one of the four highest
rating categories of a nationally recognized rating service, such as Moody's,
S&P or Fitch, and also include unrated securities that the investment manager
considers comparable in quality to securities that have been rated investment
grade. The four highest rating categories are Aaa, Aa, A and Baa for Moody's and
AAA, AA, A and BBB for both S&P and Fitch. Although securities rated in the
fourth highest rating category are considered investment grade, they are
generally more vulnerable to adverse economic conditions than securities rated
in the three highest categories and are considered to have some speculative
characteristics.
The High Yield Fund invests primarily in securities rated below investment grade
or in unrated securities that Advisers considers comparable in quality to
securities that have been rated below investment grade. Higher yields are
ordinarily available from securities that are below investment grade, although
securities that are below investment grade are generally regarded as
predominantly speculative with respect to the issuer's ability to make timely
interest and principal payments. The Fund may, however, invest in securities
rated in any rating category, including defaulted securities if Advisers
believes that the issuer may resume making interest payments or other
advantageous developments seem likely to occur in the near future. The High
Yield Fund does not currently intend to invest more than 10% of its assets in
defaulted securities. Because securities with longer maturities normally produce
higher current yields than securities with shorter maturities, the High Yield
Fund also generally invests in longer-term securities.
If the rating services lower the rating on a security in the Fund's portfolio,
the Fund will consider this change in its evaluation of the security's overall
investment merits. A change in a security's rating, however, does not
automatically require the Fund to sell the security. For a description of the
various rating categories, please see "Appendices - Description of Ratings" in
this prospectus and the SAI.
When determining whether securities are consistent with the Fund's investment
objective and policies, and thereafter when determining an issuer's comparative
credit rating, the investment manager considers the terms of an offering and
various other factors. The investment manager may, among other things, (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) analyze the issuer's financial and credit position, including all
appropriate ratios; and (iv) compare other similar securities offerings to the
issuer's proposed offering.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
total assets in taxable obligations, including (i) commercial paper rated at
least P-1 by Moody's, A-1 by S&P, or F-1 by Fitch; (ii) obligations issued or
guaranteed by the full faith and credit of the U.S. government; or (iii) with
respect to each Fund except the High Yield Fund, municipal securities of a
state, territory or local government other than its respective state or
territory. In addition, the High Yield Fund may invest a larger portion of its
assets in investment grade securities if (i) adequate quantities of securities
below investment grade are not available; (ii) unusual market conditions exist;
or (iii) the difference in yields between higher- and lower-quality securities
is so narrow that the higher risk associated with lower-quality securities is
not justified by the difference in the yields.
MUNICIPAL SECURITIES. Municipal securities are obligations that pay interest
exempt from federal income tax and that are issued by or on behalf of states,
territories or possessions of the U.S., the District of Columbia, or their
political subdivisions, agencies or instrumentalities. An opinion as to the
tax-exempt status of a municipal security is generally given to the issuer by
the issuer's bond counsel when the security is issued.
Municipal securities are issued 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 Fund has no restrictions on the maturity of municipal securities in which it
may invest. The Fund attempts to invest in municipal securities with maturities
that, in the investment manager's judgment, will provide a high level of current
income and, with respect to each Fund except the High Yield Fund, are consistent
with prudent investing. The investment manager will also consider current market
conditions when determining the securities it wants to buy and whether to hold
securities currently in the Fund's portfolio.
The Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic, business,
political or other change that affects one security may also affect other
securities in the same market segment, thereby potentially increasing market
risk. Examples of changes that may affect certain market segments include
proposed legislation affecting the financing of a project, shortages or price
increases of needed materials, or declining markets or needs for the projects.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating and variable
rate obligations. The interest rates on these obligations are not fixed, but
vary with changes in prevailing market rates on predesignated dates. The Fund
may also invest in floating or variable rate demand notes ("VRDNs"). VRDNs carry
a demand feature that allows the Fund to tender the obligation back to the
issuer or a third party before maturity, at par value plus accrued interest,
according to the terms of the obligation. Although it is not a put option in the
usual sense, the demand feature is sometimes known as a "put." Frequently, VRDNs
are secured by letters of credit or other credit support arrangements. Each
Fund, except the High Yield Fund, limits its purchase of floating and variable
rate obligations to those that are investment grade.
With respect to 75% of the total value of the Fund's assets, no more than 5% may
be in securities underlying "puts" from the same institution. The Fund may,
however, invest up to 10% of its assets in unconditional "puts," which are
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 restrictions in this paragraph do not apply to the Connecticut
or Michigan Funds.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs are
widely used by state and local governments to finance the purchase of property
and function much like installment purchase agreements. COPs are created when
long-term lease revenue obligations are issued by a governmental corporation to
pay for the acquisition of property or facilities. The property or facilities
acquired are then leased to a municipality and the lease payments are used to
repay interest and principal on the obligations issued to buy the property.
After all of the lease payments have been made, according to the terms of the
lease, 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. Thus, COPs may enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may not
be called. This period usually lasts for five to ten years. 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 these
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.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These are
trading practices where payment and delivery of the securities take place at a
future date. These transactions are subject to market fluctuations and the risk
that the value of a security at delivery may be more or less than its 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, it will maintain cash or liquid securities, with an aggregate
value equal to the amount of its purchase commitments, in a segregated account
with its custodian bank until payment is made. The Fund will not engage in
when-issued and delayed delivery transactions for investment leverage purposes.
BORROWING. The Fund may borrow up to 5% of its total assets from banks for
temporary or emergency purposes. Although the Fund does not currently intend to
do so, the Fund may also 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's policy is not to invest more than 10% of its
net assets 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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
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.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities markets,
the size of a particular offering, the credit rating of the issuer, and the
maturity of the obligation. 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 shorter-term securities due to changes in interest rates, tax laws
and other general market conditions. Lower-quality municipal securities also
generally produce higher yields than higher-quality municipal securities.
Lower-quality securities, however, generally have a higher degree of risk
associated with the issuer's ability to make timely principal and interest
payments.
HIGH YIELD MUNICIPAL SECURITIES - HIGH YIELD FUND ONLY. Because the High Yield
Fund may invest in municipal securities below investment grade, an investment in
the Fund is subject to a higher degree of risk than an investment in a fund that
invests primarily in higher-quality securities. You should 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. 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. The market value of high yield,
lower-quality municipal securities, commonly known as junk bonds, tends to
reflect individual developments affecting the issuer to a greater degree than
the market value of higher-quality securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality securities
also tend to be more sensitive to economic conditions than higher-quality
securities.
Projects financed by high yield municipal securities are often highly leveraged
and may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying these securities is generally greater
than the risk associated with higher-quality securities. For example, during an
economic downturn or a sustained period of rising interest rates, projects
financed by lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected revenue forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities. If the issuer of a security in the Fund's portfolio
defaults, the Fund may have unrealized losses on the security, which may lower
the Fund's Net Asset Value. Defaulted securities tend to lose much of their
value before they default. Thus, the Fund's Net Asset Value may be adversely
affected before an issuer defaults. In addition, the Fund may incur additional
expenses if it must try to recover principal or interest payments on a defaulted
security.
The deterioration of an issuer's creditworthiness or a default by an issuer may
make it more difficult for the Fund to manage the timing of its income. Under
the Code and U.S. Treasury regulations, the Fund may have to accrue income on
defaulted securities and distribute the income to shareholders for tax purposes,
even though the Fund is not currently receiving interest or principal payments
on the defaulted securities. To generate cash to satisfy these distribution
requirements, the Fund may have to sell portfolio securities that it otherwise
may have continued to hold or use cash flows from other sources, such as the
sale of Fund shares.
Lower-quality securities may not be as liquid as higher-quality securities.
Reduced liquidity in the secondary market may have an adverse impact on the
market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. Factors adversely affecting the market
value of high yield securities may lower the Fund's Net Asset Value.
The table below shows the percentage of the Fund's assets invested in municipal
securities rated in each of the rating categories shown. A credit rating by a
rating agency evaluates the safety of principal and interest of a security based
on an evaluation of the security's credit quality, but does not consider the
market risk or the risk of fluctuation in the price of the security. The
information shown is based on a dollar-weighted average of the Fund's portfolio
composition based on month-end assets for each of the 12 months in the fiscal
year ended February 28, 1997.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
- ----------------------------------------------------------------------------
AAA 21.9%1
AA 4.2
A 5.62
BBB 39.33
BB 25.74
B 2.65
CCC 0.9
114.6% are unrated and have been included in the AAA rating category.
20.1% are unrated and have been included in the A rating category.
313.4% are unrated and have been included in the BBB rating category.
419.6% are unrated and have been included in the BB rating category.
51.5% are unrated and have been included in the B rating category.
NONAPPROPRIATION RISK OF COPS. A feature that distinguishes COPs from more
traditional forms of municipal debt is the "nonappropriation" clause in the
lease. A nonappropriation clause allows the municipality to 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 municipality 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
municipality was paying.
While the risk of nonappropriation is inherent to COPs financing, each Fund,
except the High Yield Fund, believes that this risk may be reduced, although not
eliminated, by its policy of investing only in investment grade COPs. When
assessing the risk of nonappropriation, the rating services and the investment
manager consider, among other factors, 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. While there is no
limit as to the amount of assets that the Fund may invest in COPs, as of
February 28, 1997, the Fund held the following percentage of its net assets in
COPs or other municipal leases:
Arizona Fund 3.58%
Colorado Fund 8.73%
Connecticut Fund 0.00%
High Yield Fund 4.19%
Indiana Fund 11.10%
Michigan Fund 0.00%
New Jersey Fund 5.33%
Oregon Fund 5.01%
Pennsylvania Fund 0.39%
Puerto Rico Fund 0.00%
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 that affect the market as a whole.
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.
NON-DIVERSIFICATION RISK - CONNECTICUT AND MICHIGAN FUNDS ONLY. The Connecticut
and Michigan Funds are non-diversified series of the Trust. Under the federal
securities laws, this means the Funds are not subject to any restrictions on the
amount of their assets that they may invest in one or more issuers. An
investment in the Connecticut or Michigan Fund may involve more risk than an
investment in a fund that may not concentrate its investments in one or
relatively few issuers. These risks include increased susceptibility to adverse
economic or regulatory developments. Please see the SAI for the diversification
requirements the Funds intend to meet in order to qualify as regulated
investment companies under the Code.
State Risk Factors. Since each Fund, except the High Yield Fund, primarily
invests in municipal securities issued by or on behalf of its respective state
or territory, and that state's or territory's local governments, municipalities,
authorities, agencies and political subdivisions, its performance is closely
tied to the continuing ability of issuers of municipal securities in its
respective state or territory to meet their debt obligations and the economic
and political conditions within the state or territory. Although the Fund's
policy of investing in investment grade securities may reduce the credit and
other risks that may exist on the municipal securities of the Fund's respective
state or territory, it does not eliminate them. Before investing you should
consider the risks discussed in this prospectus. For more information about the
economy of the Fund's respective state or territory and the Fund's potential
risks, please see "Appendices - State Risk Factors" at the back of this
prospectus and the SAI.
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
Fund's 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 each of the Funds,
except the Connecticut Fund. As of October 1, 1996, Investment Advisory is the
investment manager of the Connecticut Fund. Investment Advisory employs the same
individuals to manage the Fund's portfolio as the previous manager. The terms
and conditions of the management services provided to the Fund are also the
same.
The investment manager manages the Fund's assets and makes its investment
decisions. The investment manager also performs similar services for other
funds. 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. Together,
the investment manager and its affiliates manage over $191 billion in assets,
including $44 billion in the municipal securities market. Please see "Investment
Management 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 TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers and Portfolio Manager of Investment Advisory
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 the
Franklin Templeton Group in 1986. He is a member of several municipal securities
industry-related committees and associations.
John B. Pinkham
President of Investment Advisory
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 the Franklin Templeton Group since 1985. He is a member of various
industry-related committees and associations.
John Pomeroy
Portfolio Manager of Advisers and Investment Advisory
Mr. Pomeroy has been responsible for portfolio recommendations and
decisions of the Connecticut Fund since 1990. He holds a Bachelor of Science
degree in Finance from San Francisco State University. He joined the Franklin
Templeton Group in 1986. He is a member of several securities industry-related
committees and associations.
Stella Wong
Vice President of Advisers
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Indiana, New Jersey, and Pennsylvania Funds since their inception, and the
Puerto Rico Fund since 1990. She holds a Masters degree in Financial Planning
from Golden Gate University and a Bachelor of Science degree in Business
Administration from San Francisco State University. She joined the Franklin
Templeton Group in 1986. She is a member of several securities industry-related
committees and associations.
Donald Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Arizona and Colorado Funds since their inception and the Michigan Fund since
1997. 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 with the Franklin Templeton Group since 1986. He is a member of several
industry-related committees and associations.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Arizona, Colorado, and High Yield Funds since 1987, the Oregon,
Pennsylvania, Puerto Rico and New Jersey Funds since 1989 and the Michigan Fund
since 1996. She holds a Bachelor of Science degree from San Francisco State
University. She joined the Franklin Templeton Group in 1986. She is a member of
several securities industry-related committees and associations.
Robert Schubert
Vice President of Advisers
Mr. Schubert has been responsible for portfolio recommendations and decisions of
the Oregon Fund since 1994. He attended Farleigh Dickenson University and has
been in the securities industry since 1960. He joined the Franklin Templeton
Group in 1989. Before joining the Franklin Templeton Group, he managed the bond
department for First Equity Corporation of Florida. He is a member of several
securities industry-related associations.
John Wiley
Portfolio Manager of Advisers
Mr. Wiley has been responsible for portfolio recommendations and decisions of
the Indiana Fund since 1997. He holds a Masters of Business Administration
degree in Finance from Saint Mary's College and a Bachelor of Science degree
from the University of California at Berkeley. He joined the Franklin Templeton
Group in 1989. He is a member of several securities industry-related committees
and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1997, management fees
paid to the investment manager, as a percentage of monthly net assets, and total
operating expenses of Class I and Class II were as follows:
TOTAL
OPERATING EXPENSES
MANAGEMENT ----------------------------
FEES CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund 0.48% 0.62% 1.19%
Colorado Fund 0.56% 0.71% 1.28%
Connecticut Fund 0.57% 0.72% 1.29%
High Yield Fund 0.46% 0.62% 1.18%
Indiana Fund 0.63% 0.82% -
Michigan Fund 0.00%* 0.34%* -
New Jersey Fund 0.49% 0.64% 1.21%
Oregon Fund 0.52% 0.66% 1.23%
Pennsylvania Fund 0.49% 0.64% 1.21%
Puerto Rico Fund 0.57% 0.73% 1.30%
*Management fees, before any advance waiver, totaled 0.63% and total operating
expenses were 1.21%. Under an agreement by Advisers to waive its fees, the Fund
paid the management fees and total operating expenses shown. Advisers may end
this arrangement at any time upon notice to the Board.
The Fund pays its own operating expenses. These expenses include the investment
manager's management fees; 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 the investment manager; fees of any personnel not
affiliated with the investment manager; insurance premiums; trade association
dues; expenses of obtaining quotations for calculating the Fund's Net Asset
Value; and printing and other expenses that are not expressly assumed by the
investment manager.
Under its management agreement, the Fund pays the investment manager a
management fee equal to a monthly rate of 5/96 of 1% of the value of its net
assets up to and including $100 million; and 1/24 of 1% of the value of its net
assets over $100 million up to and including $250 million; and 9/240 of 1% of
the value of its net assets in excess of $250 million. The fee is computed at
the close of business on the last business day of each month. Each class pays
its proportionate share of the management fee.
PORTFOLIO TRANSACTIONS. The investment manager tries to obtain the best
execution on all transactions. If the investment manager 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, as well as shares of other funds
in the Franklin Templeton Group of Funds, when selecting a broker or dealer.
Please see "How does the Fund Buy Securities for its Portfolio?" in the SAI for
more information.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for the Fund.
Please see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
The Michigan Fund and Class I and Class II of the remaining Funds have separate
distribution plans or "Rule 12b-1 Plans" under which they may pay or reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the Fund or class. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Michigan Fund under its plan may not exceed 0.15% per year of
the Fund's average daily net assets, although the Fund is currently only
reimbursing up to 0.10%. Payments by the remaining Funds 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. During the first year after certain Class I purchases made without a sales
charge, Distributors may keep the Rule 12b-1 fees associated with the purchase.
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 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 are usually calculated using
the maximum sales charges, but certain figures may not include sales charges.
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 received by the
Fund. 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 guarantee 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.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and 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 generally not be liable for federal
income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends are derived from interest income exempt from regular
federal income tax, and are not subject to regular federal income tax for you.
In addition, to the extent that exempt-interest dividends are derived from
interest on obligations of your state of residence or it's political
subdivisions, from interest on direct obligations of the federal government, or
from interest on U.S. territorial obligations, including Puerto Rico, the U.S.
Virgin Islands or Guam, they may also be exempt from personal income tax, if
any, in your 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 such market discount
exceeds a de minimis amount. For obligations purchased after April 30, 1993, a
portion of the gain (not to exceed the accrued portion of market discount as of
the time of sale or disposition) is treated as ordinary income rather than
capital gain. Any distributions by the Fund of such market discount income will
be taxable as ordinary income. In any fiscal year, the Fund may elect not to
distribute 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from long-term capital gain will be taxable to you as
long-term capital gain, regardless of the length of time you have owned Fund
shares and regardless of whether such distributions are received in cash or in
additional shares.
Redemptions and exchanges of Fund shares are taxable events on which 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 disallowed to the extent of any
exempt interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares will
be disallowed to the extent that you buy other shares in the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to the tax
basis that you receive in the purchase of your new 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 is eligible for the corporate dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that is taxable income or interest income that is a tax preference item under
the federal alternative minimum tax. If you have not held shares of the Fund for
a full calendar year, you may have designated as tax-exempt or as tax preference
income a percentage of income that is not equal to the actual amount of
tax-exempt or tax preference income earned during the period of your investment
in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and, in
some states, state alternative minimum taxes. Corporate shareholders are subject
to special rules.
Consistent with its investment objective, the Fund may buy private activity
bonds if, in the investment manager's opinion, the bonds represent the most
attractive investment opportunity then available to the Fund. For the fiscal
year ended February 28, 1997, the Fund derived the following percentage of its
income from bonds, the interest on which is a preference item subject to the
federal alternative minimum tax for certain investors:
Arizona Fund 14.13%
Colorado Fund 9.14%
Connecticut Fund 6.45%
High Yield Fund 14.14%
Indiana Fund 14.02%
Michigan Fund 12.67%
New Jersey Fund 8.84%
Oregon Fund 14.54%
Pennsylvania Fund 11.30%
Puerto Rico Fund 15.13%
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, are includible in the tax base for determining the extent to which a
shareholder's social security or railroad retirement benefits will be subject to
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 (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult with your personal tax advisor on the deductibility of this
interest.
If you are not considered a U.S. person for federal income tax purposes, 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 the income is distributed
to shareholders of a mutual fund. Generally, individual shareholders of the Fund
are afforded tax-exempt treatment at the state level for distributions derived
from municipal securities of their state of residency. For some investors, a
portion of this income may be subject to state alternative minimum tax. 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.
You should consult your tax advisor to determine the applicability of state or
local income or intangible property taxes to your investment in the Fund or to
distributions or redemption proceeds received from the Fund.
For more information on income taxes, please see "Appendices - State Tax
Treatment" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Connecticut and Michigan Funds are non-diversified series of the Trust. The
remaining Funds are diversified series of the Trust, an open-end management
investment company, commonly called a mutual fund. It was organized as a
Massachusetts business trust in September 1984, and is registered with the SEC.
Except for the Michigan and Indiana Funds, the Funds offer two classes of
shares: Franklin Arizona Tax-Free Income Fund - Class I, Franklin Colorado
Tax-Free Income Fund - Class I, Franklin Connecticut Tax-Free Income Fund -
Class I, Franklin High Yield Tax-Free Income Fund - Class I, Franklin New Jersey
Tax-Free Income Fund - Class I, Franklin Oregon Tax-Free Income Fund - Class I,
Franklin Pennsylvania Tax-Free Income Fund - Class I, Franklin Puerto Rico
Tax-Free Income Fund - Class I and Franklin Arizona Tax-Free Income Fund - Class
II, Franklin Colorado Tax-Free Income Fund - Class II, Franklin Connecticut
Tax-Free Income Fund - Class II, Franklin High Yield Tax-Free Income Fund -
Class II, Franklin New Jersey Tax-Free Income Fund - Class II, Franklin Oregon
Tax-Free Income Fund - Class II, Franklin Pennsylvania Tax-Free Income Fund -
Class II, Franklin Puerto Rico Tax-Free Income Fund - Class II. All shares
outstanding before the offering of Class II shares, and all shares of the
Michigan and Indiana Funds, are considered Class I shares. Additional series and
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 any 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 affecting only that class, or expressly required
to be voted on separately by state or federal law. 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.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of June 3, 1997, Resources owned of record and beneficially more than 25% of
the outstanding shares of Class I of the Michigan Fund.
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.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
- ---------------------------------------------
Open Your Account. $100
To Add to Your Account. $ 25
*We may refuse any order to buy shares.
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 OFFERINGNET 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 INVESTED 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." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers 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, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
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 a 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 Franklin Templeton Fund sales and other 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 front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. 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.
The Fund's sales charges do 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:
1. Dividend and capital gain distributions from any Franklin Templeton Fund
or a real estate investment trust (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, the 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 considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
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.
The Fund's sales charges also do not apply to Class I purchases by:
4. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million 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.
5. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
7. Registered Securities Dealers and their affiliates, for their investment
accounts only
8. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
9. 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
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
11. Accounts managed by the Franklin Templeton Group
12. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested.
3. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment 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, its investment objective
and policies, 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
want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, 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, for example, 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
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("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, except as noted below.
o The accounts must be identically registered. You may, however, 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. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into 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, operations and
shareholders, we may refuse any exchange purchase 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
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. If you would like your redemption proceeds wired
to a bank account, your instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
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 other requirements.
- -------------------------------------------------------------------------------
By Phone Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire feature.
To sign up, send us written instructions, with a signature
guarantee. To avoid any delay in processing, the instructions
should include the items listed in "By Mail" above.
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 15 days
If you do not want the ability to redeem by phone to
apply to your account, please let us know.
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -----------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service
that we make available whenever possible for redemption requests of $1,000 or
more. If we receive your request in proper form before 1:00 p.m. Pacific time,
your wire payment will be sent the next business day. For requests received in
proper form after 1:00 p.m. Pacific time, the payment will be sent the second
business day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law. Neither
the Fund nor its agents shall be liable to you or any other person if, for any
reason, a redemption request by wire is not processed as described in this
section.
If you sell shares you recently 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
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares 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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated 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 on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem 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 redeemed annually free of charge.
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 20th 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 Class I and Class II.
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 - Class I
Only" 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 before the reinvestment date
for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
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.
The Net Asset Value we use when you buy or sell shares is the one 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 your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
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 are 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 an agent, not 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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the 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 us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept
instructions 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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 - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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 - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of 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(R) 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 for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
FUND CLASS I CLASS II
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Arizona Fund 126 226
Colorado Fund 127 227
Connecticut Fund 166 266
High Yield Fund 130 230
Indiana Fund 167 -
Michigan Fund 179 -
New Jersey Fund 171 271
Oregon Fund 161 261
Pennsylvania Fund 129 229
Puerto Rico Fund 123 223
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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. Investment
Advisory is located at 16 South Main Street, Suite 303, Norwalk, Connecticut
06854. 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 Plan Services 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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the investment manager of each of the Funds
except the Connecticut Fund.
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Each Fund, except the Indiana and Michigan Funds, 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. Shares of the Indiana and
Michigan Funds are considered Class I shares for redemption, exchange and other
purposes.
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.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group
of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the
Connecticut Fund's investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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
NYSE - New York Stock Exchange
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.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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
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 other wholly owned
subsidiaries of Resources.
APPENDICES
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
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: 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 RISK FACTORS
The information provided below is based on information from independent
municipal credit reports and other historically reliable information available
to the Fund as of the date of this prospectus. It is not a complete analysis of
every material fact that may affect the ability of issuers of municipal
securities in the Fund's respective state or territory to meet their debt
obligations or the economic or political conditions within the state or
territory. The information has not been independently verified by the Fund. For
more information about the economy of the Fund's respective state or territory,
please see "Appendices - State Risk Factors" in the SAI.
ARIZONA
A cost of living below the national average and competitive wage rates have
attracted people and businesses to Arizona, especially from California. As a
result, Arizona's population grew by more than 15% during the first half of the
1990s. Although population growth is expected to remain above-average, the rate
of growth may decline as a result of California's economic recovery and thus
less migration from that state. Employment growth has also been strong, ranking
in the top ten in recent years. Driven recently by gains in the high-tech
manufacturing and export sectors, employment growth is expected to remain solid
over the long-term.
Under its constitution, Arizona is not allowed to issue general obligation debt.
Thus, gross state debt levels have remained moderate. Despite periods of
financial stress during the 1980s and early 1990s, the state's financial outlook
is generally considered stable. The effect of various tax cuts on the state's
budget, especially if the economy slows, are unknown and may create
uncertainties in future years.
COLORADO
During the 1980s, Colorado's economy was dependent on its energy sector. As a
result, the state suffered a sharp economic downturn when the energy sector
declined in the mid-to-late 1980s. Since 1991, growth in the services, trade and
government sectors has improved Colorado's economic diversification. Growth in
these areas, as well as in construction and high technology sectors, has also
helped to offset job losses caused by military base closings and the decline of
the state's mining industry. Population and income levels have also grown since
1991, often exceeding national trends. This growth is expected to continue,
although at a slower rate.
Colorado's strong economy has improved the state's financial position. During
the past three years, revenue growth has exceeded projections, primarily in the
areas of sales and income tax collections. These factors, together with the
state's relatively low debt ratios, should help the state's credit quality
remain stable.
CONNECTICUT
Connecticut has been slower to recover from the national recession of the early
1990s than most other states. In recent years, Connecticut's economy has been
weak and has lagged both national and regional economic performance. The state's
debt load has been heavy and the state has been unable to make any significant
or consistent progress towards reducing its large accumulated deficit.
Over the past year, however, Connecticut has begun to show some signs of
progress.
The difference between Connecticut's economic growth rate and that of the
nation, as measured by job gains and personal income growth, has narrowed. In
January 1997, the state's growth in non-farm jobs was up 1% from the same time a
year ago, although still below the national growth rate of 2.2%. Connecticut's
growth industries have included technology, business services and
communications. Losses in the higher-paying manufacturing and financial,
insurance and real estate sectors have been replaced by lower-paying jobs in
tourism and related service sectors. This has resulted in a slight decline in
the state's income relative to the nation, although the state has remained the
richest state in the U.S. with per capita income at 133% of the national
average. Despite an increase in the size of its labor force, unemployment rates
have also compared favorably to the nation and were recently at there lowest
rate in six years.
The state ended fiscal 1996 with its fifth consecutive surplus and was able to
reduce its accumulated general fund deficit from $496 million to $399 million.
Over the long-term, however, progress in its deficit reduction has been slow,
considering the deficit was $477 million at the end of fiscal 1992.
INDIANA
Indiana's economy has been relatively volatile, with cyclical tax and employment
bases. During the early to mid-1980's, the state's economy was heavily dependent
on its historically dominant manufacturing sector, particularly the steel and
automobile sectors. This dependence on durable manufacturing led to increased
economic volatility during the first half of the 1980s. Companies within
Indiana's manufacturing sector have been downsizing and restructuring over the
past fifteen years, which may help reduce Indiana's vulnerability to
manufacturing-based recessions. Nonetheless, Indiana's manufacturing sector
recently accounted for 23% of the labor force, the second highest percentage
among the fifty states.
During the last four years, Indiana's income and employment growth has exceeded
most other states in the Great Lakes region. Indiana's important manufacturing
sector has also experienced positive growth in recent years, helping to support
growth in the trade and service sectors. Its central location, competitive cost
of living and business costs, and extensive transportation network have combined
to make Indiana a low-cost alternative for various service and back-office
operations. Airport expansion projects and the construction of a $1 billion
United Airlines maintenance facility have contributed to the emergence of
Indiana as a transportation and distribution hub.
MICHIGAN
Michigan's economy has continued to rely on national economic trends, especially
the demand for durable goods. Its economic base is dependent on its
manufacturing sector, which accounts for more than 33% of the state's total
personal income. While this sector has been strong since the end of the national
recession in the early 1990s, the state's reliance on manufacturing has made its
economy potentially more volatile than the economies of more diverse states.
While Michigan fared better during the last economic slowdown than in prior
slowdowns, its employment losses were more severe than those of the region or
nation. Michigan's losses were mostly due to its significant dependence on
transportation equipment and related durable goods manufacturing. In recent
years, Michigan has made some improvements in the diversity of its economy, with
strong growth in its services sector.
Michigan's fiscal position has improved steadily, prompting S&P to revise the
state's outlook from negative to stable in March 1994. As of March 1997, S&P
still considered Michigan's outlook to be stable. Tighter budget controls and
the positive effect on revenues of the state's strong economy has allowed the
state to replenish its reserves, which had been severely depleted during the
early 1990s.
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 significant layoffs in
manufacturing and construction leading to the elimination of 6.3% of the state's
jobs. Since the recession, the economy has improved, although job and income
growth have continued to lag the rest of the nation. Growth has been strongest
in the service sector, while pharmaceuticals, communications, and public
utilities have continued to decline. Recently, nonagricultural employment levels
were at their highest since 1990, although still 25% below their prerecession
peak.
Some of the largest commercial and industrial firms in the U.S. are
headquartered in New Jersey, as its lower taxes and other business costs make it
an attractive alternative to New York City. With new corporate mergers and
downsizing, however, economic growth in New Jersey is expected to remain slow to
moderate over the next several years. While personal income growth has been
slower than at the national level, New Jersey has remained one of the wealthiest
states, ranking second in per capita income to Connecticut.
OREGON
Over the past eight years, Oregon's rates of growth in per capita income,
population and employment have all exceeded the national average. The state's
economy has continued to diversify, with less dependence on the timber industry
and more emphasis on services. Recently, the service sector accounted for 25.9%
of total non-farm employment and much of the state's employment growth. Hi-tech
manufacturing, especially semi-conductors, and housing construction spurred by
significant immigration, primarily from California, have also contributed to the
state's growth.
Oregon's growth is expected to continue, although at a slower pace. Future
growth is dependent on the continued strength of the national economy, as well
as the strength of the state's hi-tech industries. Economic growth may be
hampered, however, by an improving economy in California, as well as Oregon's
rising labor and housing costs.
The strength of Oregon's economy has helped the state maintain positive
financial results. Recently, however, voters approved two initiatives limiting
property taxes. The full implementation of these initiatives may create fiscal
pressures going forward.
PENNSYLVANIA
While Pennsylvania's economy has been recovering from the recession of the early
1990s, its rate of growth has remained below the national average. Between 1990
and 1995, non-farm jobs grew an average of 0.3% per year in Pennsylvania, while
growth at the national level was 1.4%. For the year ending January 1997,
non-farm job growth in Pennsylvania improved to a rate of 0.7%, compared to the
national rate of 2.2% for the same period. Important sectors of Pennsylvania's
economy, such as telecommunications, health care and defense contracting, have
recently experienced consolidations, layoffs and cost-cutting measures. In
general, the Northeast has been the slowest growing region in the U.S.
Despite its slow economic growth, Pennsylvania's outlook is considered stable.
The state's debt levels have been relatively moderate, only slightly above
national medians. Over the next two years, the state may need to address some
outstanding litigation issues, including possible changes in the funding of the
state's school system and the state's judicial system, which is currently funded
at the county level.
PUERTO RICO
Puerto Rico's economy has relied heavily on the U.S. mainland's economy. Since
1991-1992 when growth was less than 1%, Puerto Rico has experienced an economic
turnaround similar to the turnaround of the overall U.S. economy. Over the past
four years, Puerto Rico's GNP has grown by an average of 3.1%. Employment has
likewise grown by an average of almost 4% over the last two years. Areas of
growth within Puerto Rico's economy have included construction, trade and
services, which recently accounted for more than 50% of the employment base, and
tourism. Manufacturing has been a large part of the economy, especially
pharmaceutical production, recently accounting for 41% of Puerto Rico's GNP and
15% of its employment base.
Puerto Rico's economy may face challenges in the near future with Congress'
passage of a bill eliminating Section 936 of the Code. This Code section gives
certain U.S. corporations operating in Puerto Rico significant tax advantages.
These incentives have helped considerably with the economic growth of Puerto
Rico, especially with the development of Puerto Rico's manufacturing sector.
U.S. firms benefiting from these incentives have provided a large portion of
Puerto Rico's revenues, employment and deposits in local financial institutions.
Fortunately, the elimination of Section 936 is scheduled to occur over a ten
year phase-out period. This is expected to give Puerto Rico sufficient time to
lessen the potentially negative effects of the elimination of Section 936.
PROSPECTUS & APPLICATION
FRANKLIN FEDERAL
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
TRUST
INVESTMENT STRATEGY
TAX-FREE INCOME
JULY 1, 1997
FRANKLIN TAX-FREE TRUST
THIS PROSPECTUS DESCRIBES THE FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME
FUND (THE "FUND"). IT CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING IN
THE FUND. PLEASE KEEP IT FOR FUTURE REFERENCE.
THE FUND HAS A STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JULY 1, 1997,
WHICH MAY BE AMENDED FROM TIME TO TIME. IT 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 ITS
ADDRESS.
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, JURISDICTION OR COUNTRY 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.
FRANKLIN
FEDERAL
INTERMEDIATE- TERM TAX-FREE
INCOME FUND
JULY 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. 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? 7
Who Manages the Fund? ........ 8
How does the Fund Measure Performance? 10
How Taxation Affects the Fund and
its Shareholders ............ 10
How is the Trust Organized? .. 13
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ......... 14
May I Exchange Shares for Shares of
Another Fund? ............... 18
How Do I Sell Shares? ........ 19
What Distributions Might I Receive
from the Fund? .............. 22
Transaction Procedures and Special
Requirements ................ 23
Services to Help You Manage Your Account 27
What If I Have Questions About My Account? 29
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 28, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 2.25%++
Deferred Sales Charge None+++
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.63%*
Rule 12b-1 Fees 0.09%**
Other Expenses 0.12%
------
Total Fund Operating Expenses 0.84%*
=======
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------------
$31*** $49 $68 $124
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. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.47% and total Fund operating
expenses were 0.68%.
**These fees may not exceed 0.10%. 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.
***Assumes a Contingent Deferred Sales Charge will not apply.
<TABLE>
<CAPTION>
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 five years appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended February
28, 1997. The Annual Report to Shareholders also includes more information about
the Fund's performance. For a free copy, please call Fund Information.
YEAR ENDED FEB. 28 1997 1996 1995 1994 1993*
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period $10.95 $10.48 $10.80 $10.54 $10.00
------------------------------------------------------------------
Net Investment Income .55 .55 .54 .52 .14
Net Realized & Unrealized Gain (Loss)
on Securities (.007) .468 (.331) .289 .499
------------------------------------------------------------------
Total From Investment Operations .543 1.018 .209 .809 .639
==================================================================
Distributions From Net Investment Income (.553) (.548) (.529) (.549) (.099)
Total Distributions (.553) (.548) (.529) (.549) (.099)
------------------------------------------------------------------
Net Asset Value at End of Period $10.94 $10.95 $10.48 $10.80 $10.54
------------------------------------------------------------------
Total Return+ 5.12% 9.93% (.20)% 7.82% 14.77%**
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $104,715 $85,967 $73,977 $67,603 $9,192
Ratio of Expenses to Average
Net Assets++ .68% .65% .56% .30% -
Ratio of Net Investment Income
to Average Net Assets 5.16% 5.12% 5.25% 4.93% 5.49%**
Portfolio Turnover Rate 22.54% 3.35% 38.46% 28.76% 22.54%
</TABLE>
*For the period September 21, 1992 (effective date) 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 at Net Asset Value.
++For the periods indicated, Advisers agreed in advance to limit its management
fees and to make certain payments to reduce the Fund's expenses. 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
1997 0.84
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors with as high a level of
income exempt from federal income taxes, including the individual alternative
minimum tax, as is consistent with prudent investing, while seeking preservation
of shareholders' capital. The objective is a fundamental policy of the Fund and
may not be changed without shareholder approval. Of course, there is no
assurance that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund attempts 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. It is
possible, although not anticipated, that up to 20% of the Fund's total assets
could be in taxable obligations.
The Fund maintains a dollar-weighted average portfolio maturity of three to ten
years and invests primarily in investment grade securities. Investment grade
securities are securities rated in one of the four highest rating categories of
a nationally recognized rating service, such as Moody's, S&P or Fitch, and also
include unrated securities that Advisers considers comparable in quality to
securities that have been rated investment grade. The four highest rating
categories are Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for both
S&P and Fitch. Although securities rated in the fourth highest rating category
are considered investment grade, they are generally more vulnerable to adverse
economic conditions than securities rated in the three highest categories and
are considered to have some speculative characteristics. If the rating services
lower the rating on a security in the Fund's portfolio, the Fund will consider
this change in its evaluation of the security's overall investment merits. A
change in a security's rating, however, does not automatically require the Fund
to sell the security. For a description of the various rating categories, please
see "Appendix - Description of Ratings" in the SAI.
When determining whether securities are consistent with the Fund's investment
objective and policies and thereafter when determining an issuer's comparative
credit rating, Advisers considers the terms of an offering and various other
factors. Advisers may, among other things, (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) analyze the issuer's
financial and credit position, including all appropriate ratios; and (iv)
compare other similar securities offerings to the issuer's proposed offering.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
total assets in taxable obligations, including (i) commercial paper rated at
least P-1 by Moody's, A-1 by S&P, or F-1 by Fitch; or (ii) obligations issued or
guaranteed by the full faith and credit of the U.S. government.
MUNICIPAL SECURITIES. Municipal securities are obligations that pay interest
exempt from federal income tax and that are issued by or on behalf of states,
territories or possessions of the U.S., the District of Columbia, or their
political subdivisions, agencies or instrumentalities. An opinion as to the
tax-exempt status of a municipal security is generally given to the issuer by
the issuer's bond counsel when the security is issued.
Municipal securities are issued 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 Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic, business,
political or other change that affects one security may also affect other
securities in the same market segment, thereby potentially increasing market
risk. Examples of changes that may affect certain market segments include
proposed legislation affecting the financing of a project, shortages or price
increases of needed materials, or declining markets or needs for the projects.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating and variable
rate obligations. The interest rates on these obligations are not fixed, but
vary with changes in prevailing market rates on predesignated dates. The Fund
may also invest in floating or variable rate demand notes ("VRDNs"). VRDNs carry
a demand feature that allows the Fund to tender the obligation back to the
issuer or a third party before maturity, at par value plus accrued interest,
according to the terms of the obligation. Although it is not a put option in the
usual sense, the demand feature is sometimes known as a "put". Frequently, VRDNs
are secured by letters of credit or other credit support arrangements. The Fund
limits its purchase of floating and variable rate obligations to those that are
investment grade.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs are
widely used by state and local governments to finance the purchase of property
and function much like installment purchase agreements. COPs are created when
long-term lease revenue obligations are issued by a governmental corporation to
pay for the acquisition of property or facilities. The property or facilities
acquired are then leased to a municipality and the lease payments are used to
repay interest and principal on the obligations issued to buy the property.
After all of the lease payments have been made according to the terms of the
lease, 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. Thus, COPs may enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may not
be called. This period usually lasts for five to ten years. 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 these
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, an
investment in callable bonds is subject to the Fund's policy of maintaining a
dollar-weighted average portfolio maturity of three to ten years.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These are
trading practices where payment and delivery of the securities take place at a
future date. These transactions are subject to market fluctuations and the risk
that the value of a security at delivery may be more or less than its 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, it will maintain cash or liquid securities, with an aggregate
value equal to the amount of its purchase commitments, in a segregated account
with its custodian bank until payment is made. The Fund will not engage in
when-issued and delayed delivery transactions for investment leverage purposes.
BORROWING. The Fund may borrow up to 5% of its total assets from banks for
temporary or emergency purposes. Although the Fund does not currently intend to
do so, the Fund may also 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's policy is not to invest more than 10% of its
net assets 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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
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.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities markets,
the size of a particular offering, the credit rating of the issuer and the
maturity of the obligation. 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 shorter-term securities due to changes in interest rates, tax laws
and other general market conditions. Lower-quality municipal securities also
generally produce higher yields than higher-quality municipal securities.
Lower-quality securities, however, generally have a higher degree of risk
associated with the issuer's ability to make timely principal and interest
payments.
NONAPPROPRIATION RISK OF COPS. A feature that distinguishes COPs from more
traditional forms of municipal debt is the "nonappropriation" clause in the
lease. A nonappropriation clause allows the municipality to 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 municipality 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
municipality was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk may be reduced, although not eliminated, by its policy
of investing only in investment grade COPs. When assessing the risk of
nonappropriation, the rating services and Advisers consider, among other
factors, 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. While there is no limit as to the amount of
assets that the Fund may invest in COPs, as of February 28, 1997, 14.68% of the
Fund's net assets was in COPs or other municipal leases.
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 that affect the market as a whole.
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.
NON-DIVERSIFICATION RISK. The Fund is a non-diversified series of Franklin
Tax-Free Trust (the "Trust"). Under federal securities laws, this means the Fund
is not subject to any restrictions on the amount of its assets that it may
invest in one or more issuers. An investment in the Fund may involve more risk
than an investment in a fund that may not concentrate its investments in one or
relatively few issuers. These risks include increased susceptibility to adverse
economic or regulatory developments. Please see "Investment Restrictions" in the
SAI for the diversification requirements the Fund intends to meet in order to
qualify as a regulated investment company under the Code.
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 manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. 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. Together, Advisers and its
affiliates manage over $191 billion in assets, including $44 billion in the
municipal securities market. Please see "Investment Management 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 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 Ms. Amoroso
since 1997.
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. Mr. Kenny 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 the Franklin Templeton Group in 1986. He is a member of several municipal
securities industry-related committees and associations.
Robert Schubert
Vice President of Advisers
Mr. Schubert attended Farleigh Dickenson University and has been in the
securities industry since 1960. He joined the Franklin Templeton Group in 1989.
Before joining the Franklin Templeton Group, he managed the bond department for
First Equity Corporation of Florida. He is a member of several securities
industry-related associations.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso holds a Bachelor of Science degree from San Francisco State
University. She joined the Franklin Templeton Group in 1986. She is a member of
several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1997, management
fees, before any advance waiver, totaled 0.63% and operating expenses, before
any advance waiver, totaled 0.84% of the average net assets of the Fund. Under
an agreement by Advisers to limit its fees, the Fund paid management fees
totaling 0.47% and operating expenses totaling 0.68%. 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, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" 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 the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Fund under the plan may not exceed 0.10% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase. 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 are usually calculated using the maximum sales charge,
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 received by the Fund. 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 guarantee 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.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and 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 generally not be liable for federal
income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends are derived from interest income exempt from regular
federal income tax, and are not subject to regular federal income tax for you.
In addition, to the extent that exempt-interest dividends are derived from
interest on obligations of your state of residence or its political
subdivisions, from interest on direct obligations of the federal government, or
from interest on U.S. territorial obligations, including Puerto Rico, the U.S.
Virgin Islands or Guam, they may also be exempt from personal income tax in your
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 such market discount
exceeds a de minimis amount. For obligations purchased after April 30, 1993, a
portion of the gain (not to exceed the accrued portion of market discount as of
the time of sale or disposition) is treated as ordinary income rather than
capital gain. Any distribution by the Fund of such market discount income will
be taxable as ordinary income. In any fiscal year, the Fund may elect not to
distribute 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from long-term capital gain will be taxable to you as
long-term capital gain, regardless of the length of time you have owned Fund
shares and regardless of whether such distributions are received in cash or in
additional shares.
Redemptions and exchanges of Fund shares are taxable events on which 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 disallowed to the extent of any
exempt-interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares will
be disallowed to the extent that you purchase other shares in the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to the tax
basis that you receive in the purchase of your new 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 is eligible for the corporate dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that is taxable income or interest income that is a tax preference item under
the federal alternative minimum tax. If you have not held shares of the Fund for
a full calendar year, you may have designated as tax-exempt or as tax preference
income a percentage of income that is not equal to the actual amount of
tax-exempt or tax preference income earned during the period of your investment
in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and, in
some states, state alternative minimum taxes. Corporate shareholders are subject
to special rules.
Consistent with its investment objective, the Fund may buy private activity
bonds if, in Advisers' opinion, the bonds represent the most attractive
investment opportunity then available to the Fund. For the fiscal year ended
February 28, 1997, the Fund derived 13.13% of its income from bonds, the
interest on which is a preference item subject to the federal alternative
minimum tax for certain investors.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, are includable in the tax base for determining the extent to which a
shareholder's social security or railroad retirement benefits will be subject to
regular federal income tax. You are required to disclose the receipt of
tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult with your personal tax advisor on the deductibility of this
interest.
You should also consult your tax advisor to determine whether other state or
local income or intangible taxes will apply to your investment in the Fund or to
distributions or 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 considered a U.S. person for federal income tax purposes, 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.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of the Trust, an open-end management
investment company, commonly called a mutual fund. It was organized as a
Massachusetts business trust in September 1984, and is registered with the SEC.
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. Additional series and
classes of shares may be offered in the future.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
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. CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
- -------------------------------------------
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares.
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.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE
AS A PERCENTAGE OF AMOUNT PAID
---------------------- TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING 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 invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the 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 a 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 Franklin Templeton Fund sales and other 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 front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1 or 2
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) the distributions may be from either Class I or
Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (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, the 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 considered a redemption for this privilege. The
Contingent Deferred Sales Charge will not be waived if the shares were
subject to a Contingent Deferred Sales Charge when sold. We will credit
your account in shares, at the current value, in proportion to the amount
reinvested for any Contingent Deferred Sales Charge paid in connection with
the earlier redemption, 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.
The Fund's sales charges also do not apply to purchases by:
4. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million 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.
5. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
7. Registered Securities Dealers and their affiliates, for their investment
accounts only
8. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
9. 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
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
11. Accounts managed by the Franklin Templeton Group
12. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 0.75% of the amount invested.
2. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraph 1 above will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment 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, its investment objective
and policies, 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
want to exchange
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, 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, for example, 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, except as noted below.
o The accounts must be identically registered. You may, however, 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. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into 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, operations and
shareholders, we may refuse any exchange purchase 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
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.
If you would like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union,
the name of the corresponding bank and the account
number
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 other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send
us written instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should include the
items listed in "By Mail" above.
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 15 days
- If you do not want the ability to redeem by phone to
apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR
DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold 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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated 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 on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million, you
can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge.
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 20th 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 before the reinvestment date for us to
process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, 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.
The Net Asset Value we use when you buy or sell shares is the one 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 your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
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 are 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 an agent, not 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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the 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 us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept
instructions 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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
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CORPORATION Corporate Resolution
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PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
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TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
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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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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 end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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(R) 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 for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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)
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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 Plan Services 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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
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
multiple classes of shares. The different 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 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.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 2.25%.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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
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 other wholly owned
subsidiaries of Resources.
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
JULY 1, 1997
TABLE OF CONTENTS
How does the Fund Invest its Assets?.................2
Investment Restrictions..............................5
Officers and Trustees................................6
Investment Management
and Other Services..................................9
How does the Fund Buy
Securities for its Portfolio?......................10
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?..............18
Miscellaneous Information ..........................22
Financial Statements ...............................24
Useful Terms and Definitions .......................24
Appendices .........................................24
Description of Ratings .............................24
State Risk Factors .................................27
State Tax Treatment ................................29
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- ------------------------------------------------------------------------------
This SAI describes the seven series of Franklin Tax-Free Trust (the "Trust"),
an open-end management investment company, listed below. Each series may
individually or together be referred to as the "Fund(s)".
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
The Fund's investment objective is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The state
specific Funds also seek 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 Fund seeks to achieve its objective by investing primarily in municipal
securities covered by insurance guaranteeing the scheduled payment of
principal and interest.
The Prospectus, dated July 1, 1997, 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.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
All of the Funds, except the Arizona and Florida Funds, are diversified
series of the Trust. The Arizona and Florida Funds are non-diversified
series. As a fundamental policy, none of the diversified Funds will buy a
security if, with respect to 75% of its net assets, more than 5% 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, 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, is considered a separate issuer. Escrow-secured or defeased
bonds, described below, are not generally considered an obligation of the
original municipality when determining diversification. Please see
"Investment Restrictions" for the diversification requirements the Arizona
and Florida Funds intend to meet.
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
The Prospectus contains a general description of municipal securities. The
following provides more detailed information about the various municipal
securities and other securities in which the Fund may invest. There may be
other types of municipal securities that become available that are similar to
those described below and in which the Fund may also invest, if consistent
with its investment objectives and policies.
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 the receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program.
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. This typically represents a short-term
obligation (270 days or less) issued by a municipality to meet working
capital needs.
MUNICIPAL BONDS. These meet longer-term capital needs and generally have
maturities of more than one year when issued. They 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. 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. Revenue bonds are not secured by the full faith, credit and
taxing power of the 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 that may be used to make principal and interest payments on the issuer's
obligations. Some authorities are provided 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 facility or other personal property as security for
payment.
FLOATING OR VARIABLE RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations with a floating or variable interest rate. They have 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, before specified dates. The payment may be received either
from the issuer or by drawing on a bank letter of credit, a guarantee or
insurance issued with respect to the note. The interest rate is adjustable at
intervals ranging from daily up to monthly, and is calculated to maintain the
market value of the VRDN at approximately its par value upon the adjustment
date.
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently issued on a
"when-issued" basis. When so issued, 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
assets of the Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income on those assets. It is the Fund's
intention, however, to be fully invested to the extent practicable and
consistent with its investment policies. When the Fund makes the commitment
to buy a municipal security on a when-issued basis, it records the
transaction and reflects the value of the security in the determination of
its Net Asset Value. The Fund believes that its Net Asset Value or income
will not be adversely affected by its purchase of municipal securities on a
when-issued basis.
CALLABLE BONDS. Callable bonds allow the issuer to redeem the bonds before
their maturity dates. To protect bondholders, however, callable bonds may be
issued with provisions that prevent them from being called for a period of
time, typically five to ten years from the date of issue. During times of
generally declining interest rates, if the call-protection on a callable bond
expires, there is an increased likelihood that the bond may be called by the
issuer. Advisers may sell a callable bond before its call date, if it
believes the bond is at its maximum premium potential.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds
may have an impact on the Fund's Net Asset Value. Based on a number of
factors, including certain portfolio management strategies used by Advisers,
the Fund believes it has reduced the risk of an adverse impact on its Net
Asset Value based on calls of callable bonds. In light of the Fund's pricing
policies and because the Fund follows certain amortization procedures
required by the IRS, the Fund is not expected to suffer any material adverse
impact related to the value at which the Fund has carried the bonds in
connection with calls of bonds purchased at a premium. Notwithstanding these
policies, however, the reinvestment of the proceeds of any called bond may be
in bonds that pay a 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.
ESCROW-SECURED 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 uses 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 often receive a
triple A or equivalent rating from Moody's, S&P or Fitch.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on the municipal securities.
ZERO-COUPON SECURITIES. The Fund may invest in zero-coupon and delayed
interest securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
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 date
approaches. If the issuer defaults, the Fund may not obtain any return on its
investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value is generally more
volatile than the value of 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.
The Fund's investment in zero-coupon and delayed interest securities may
cause the Fund to recognize income and make distributions to shareholders
before it receives any cash payments on its investment. In order to generate
cash to satisfy distribution requirements, the Fund may be required to sell
portfolio securities that it otherwise may have continued to hold or to use
cash flows from other sources such as the sale of Fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Fund may invest a portion of its
assets in convertible and step coupon bonds. Convertible bonds 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 when the security is issued.
U.S. GOVERNMENT OBLIGATIONS. These are issued by the U.S. Treasury or by
agencies and instrumentalities of the U.S. government and are backed by the
full faith and credit of the U.S. government. They include Treasury bills,
notes and bonds.
COMMERCIAL PAPER. This refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
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 such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with
the Fund's custodian 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 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.
INSURANCE
Each insured municipal security in the Fund's portfolio is covered by either
a "New Issue Insurance Policy," a "Portfolio Insurance Policy" or a
"Secondary Insurance Policy" issued by a qualified municipal bond insurer.
The insurance feature insures the scheduled payment of principal and
interest, but does not guarantee (i) the market value of the insured
municipal security, (ii) the value of the Fund's shares, nor (iii) the Fund's
dividend distributions.
Under the provisions of an insurance policy, the insurer unconditionally and
irrevocably agrees to pay the appointed trustee or its successor and its
agent (the "Trustee") the portion of the principal or interest on an insured
security that is due for payment but that has not been paid by the issuer.
The insurer makes such payments to the Trustee on the date the principal or
interest becomes due for payment or on the next business day following the
day on which the insurer receives notice of nonpayment, whichever is later.
The Trustee then disburses the amount of principal or interest due to the
Fund after the Trustee receives (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 the principal or interest due for payment will vest in the
insurer. After the disbursement, the insurer becomes the owner of the
security, appurtenant coupon, or right to payment of principal or interest on
the security and is fully subrogated to all of the Fund's rights with respect
to the security, including the right to payment. The insurer's rights to the
security or to payment of principal or interest are limited, however, to the
amount the insurer has paid.
Under certain circumstances, a Portfolio Insurance Policy may affect the
value of the Fund's shares. As discussed in the Prospectus, unless the Fund
buys a Secondary Insurance Policy, the Fund intends to hold any defaulted
security, or security 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 this event, Advisers will consider
the value of the insurance for the principal and interest payments, the
market value of the portfolio security, the market value of securities of
similar issuers whose securities carry similar interest rates, and the
discounted present value of the principal and interest payments to be
received from the insurance company in its evaluation of the security. Absent
any unusual or unforeseen circumstances as a result of the Portfolio
Insurance Policy, Advisers would likely recommend that the Fund value the
defaulted security, or security 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 Insurance Policy,
however, would be valued at its market value.
If the issuer of an insured municipal security fails to pay an installment of
principal or interest that is due for payment, the Fund will receive an
insurance payment in the amount of the payment due. When referring to the
principal amount, the term "due for payment" means the security's stated
maturity date or its call date for mandatory sinking fund redemption. It does
not mean any earlier date when payment is due because of a call for
redemption (other than by mandatory sinking fund redemption), acceleration or
other advancement of maturity. When referring to the interest on a security,
the term "due for payment" means the stated date for payment
of interest.
The term "due for payment" may have another meaning if the interest on a
security is determined to be subject to federal income taxation, as provided
in the security's underlying documentation. When referring to the principal
amount in this case, the term also means the call date for mandatory
redemption as a result of the determination of taxability, and when referring
to the interest on the security, the term also means the accrued interest, to
the call date for mandatory redemption, at the rate provided in the
security's documentation together with any applicable redemption premium.
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 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 with respect to the
Arizona and Florida Funds, each of which will not purchase a security, if as
a result: i) more than 25% of its total assets would be invested in the
securities of a single issuer or ii) with respect to 50% of its total assets,
more than 5% of its assets would be invested in the securities of a single
issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of
the Trust's officers, trustees, or investment advisor 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 Fund to invest in shares of one or more investment companies, of
the type generally referred to as money market funds, managed by Advisers 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 the value or
liquidity 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 Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund 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 Fund 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 (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 29 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
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, General
Host Corporation (nursery and craft centers); and director or trustee, as the
case may be, of 55 of the investment companies in the Franklin Templeton
Group of Funds.
David W. Garbellano (82)
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 or trustee, as
the case may be, of 28 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 54 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
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.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most other subsidiaries of Franklin Resources, Inc. and of 58 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 50 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52)
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.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc. and
Franklin Mutual Advisers, Inc.; and officer and/or director or trustee, as
the case may be, of most other subsidiaries of Franklin Resources, Inc. and
58 of the investment companies in the Franklin Templeton Group of Funds.
Don Duerson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Vice President, Franklin Advisers, Inc.; and officer of one investment
company in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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.; Director and Executive Vice President, Templeton Worldwide,
Inc.; Director, Executive Vice President and Chief Operating Officer,
Templeton Investment Counsel, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer, Franklin Investment Advisory Services,
Inc.; President, Franklin Templeton Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of 58 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 58 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (34)
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 Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton 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 or trustees 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 FRANKLIN TEMPLETON
RECEIVED FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME FROM THE TRUST*GROUP OF FUNDS** WHICH EACH SERVES***
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Frank H. Abbott, III...... $29,900 $165,236 29
Harris J. Ashton.......... $29,900 $343,591 53
S. Joseph Fortunato....... $29,900 $360,411 55
David W. Garbellano....... $28,600 $148,916 28
Frank W.T. LaHaye......... $29,900 $139,233 27
Gordon S. Macklin......... $29,900 $335,541 50
*For the fiscal year ended February 28, 1997.
**For the calendar year ended December 31, 1996.
***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 59 registered investment companies, with
approximately 167 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 or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
Fund or other funds in the Franklin Templeton Group of Funds. 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, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
44,816 shares of the Michigan Fund - Class I and 584 shares of the Insured
Fund - Class I, or less than 1% of the total outstanding shares of each
Fund's Class I 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 MANAGEMENT
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 and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. 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. 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. Please see "Miscellaneous Information - Summary of 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% of the value of its net
assets up to and including $100 million; and 1/24 of 1% of the value of its
net assets over $100 million up to and including $250 million; and 9/240 of
1% of the value of its net assets in excess of $250 million. The fee is
computed at the close of business on the last business day of each month.
Each class pays its proportionate share of the management fee.
The table below shows the management fees paid by the Fund for the fiscal
years ended February 28, 1995, February 29, 1996 and February 28, 1997.
MANAGEMENT FEES PAID
1997 1996 1995
- ------------------------------------------------------------------------------
Arizona Fund ............................... $ 9,209* $ 0* $ 0*
Florida Fund ............................... 126,611* 92,697* 43,007*
Insured Fund ............................... 7,848,890 7,882,310 7,903,871
Massachusetts Fund ......................... 1,649,833 1,580,640 1,540,886
Michigan Fund .............................. 5,284,581 5,130,941 4,846,714
Minnesota Fund ............................. 2,439,817 2,430,182 2,401,351
Ohio Fund .................................. 3,391,314 3,268,575 3,181,729
*For the fiscal years ended February 28, 1995, February 29, 1996 and February
28, 1997, management fees, before any advance waiver, totaled $102,744,
$190,058 and $238,269, respectively, for the Arizona Fund, and $239,908,
$362,566 and $447,534, respectively, for the Florida Fund. Under an agreement
by Advisers to limit its fees, the Arizona and Florida Funds paid the
management fees shown.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1998. 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.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. The fee is paid by Advisers. It is not a separate expense of the
Fund.
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.
CUSTODIAN. 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. The custodian does 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 28, 1997, 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 28, 1997.
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 Advisers receives 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 staffs 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, as well as shares of other funds in the Franklin
Templeton Group of Funds, 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, 1995, February 29, 1996 and
February 28, 1997, the Fund paid no brokerage commissions.
As of February 28, 1997, 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 may 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 to $2 million, plus 0.60% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100
million. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
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 acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they 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 before 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
before 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
objectives 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 25th day of the
month in which a payment is scheduled. If the 25th falls on a weekend or
holiday, we will process the redemption on the next business day for Class I
shares and on the prior business day for Class II shares. If the processing
dates are different, the date of the Net Asset Value used to redeem the
shares will also be different for Class I and Class II shares.
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. 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.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- ------------------------------------------------------------------------------
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE
is open for trading. As of the date of this SAI, the Fund is informed that
the NYSE 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. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
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 NYSE. 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 NYSE 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 capital loss carryforward or
post-October loss deferral) may generally be made twice each year, once in
December and once following the end of the Fund's fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 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 12 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. The Fund
intends, as a matter of policy, to declare and pay these dividends, if any,
in December to avoid the imposition of this tax, but can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation,
gain or loss will be recognized in an amount equal to the difference between
your basis in the shares and the amount realized from the transaction,
subject to the rules described below. If you hold your shares as a capital
asset, gain or loss realized will be capital gain or loss and will be
long-term for federal income tax purposes if the shares have been held for
more than one year.
Any loss realized upon the redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you from your investment
in the Fund and will be disallowed to the extent of exempt-interest dividends
paid to you with respect to such shares.
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 90 days of their purchase (for purposes of determining gain or loss
upon the sale of such shares) if the sale proceeds are reinvested 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 your tax advisor concerning the tax rules
applicable to the redemption or exchange of Fund shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a 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
commercial paper do not generally qualify for tax-free treatment. To the
extent that such investments are made, the Fund will provide you with the
percentage of any dividends paid that 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 on the application of other state and local laws on
distributions and redemption proceeds received from the Fund. For more
information, please see "Appendices - State Tax Treatment."
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, Distributors acts as principal
underwriter in a continuous public offering for each class 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.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after
allowances to dealers, and the amounts received by Distributors in connection
with redemptions or repurchases of shares for the fiscal years ended February
28, 1995, February 29, 1996 and February 28, 1997
AMOUNT RECEIVED
TOTAL AMOUNT IN CONNECTION
COMMISSIONS RETAINED BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
- ------------------------------------------------------------------------------
1997
Arizona Fund.......................... $ 325,449 $ 20,962 $ 0
Florida Fund.......................... 471,751 30,514 0
Insured Fund.......................... 3,651,499 232,191 6,263
Massachusetts Fund.................... 996,784 64,688 1,328
Michigan Fund......................... 3,025,658 186,288 7,786
Minnesota Fund........................ 1,061,069 65,580 2,804
Ohio Fund............................. 2,389,162 144,651 9,688
1996
Arizona Fund.......................... $ 354,716 $ 23,459 $ 0
Florida Fund.......................... 529,386 35,378 7,440
Insured Fund.......................... 3,860,342 257,256 1,217
Massachusetts Fund.................... 907,321 59,564 0
Michigan Fund......................... 1,214,412 241,446 2,150
Minnesota Fund........................ 1,213,674 77,132 0
Ohio Fund............................. 2,230,958 138,652 0
1995
Arizona Fund.......................... $ 249,896 $ 22,641 --
Florida Fund.......................... 508,390 47,307 --
Insured Fund.......................... 4,263,865 241,510 --
Massachusetts Fund................... 876,196 50,875 --
Michigan Fund......................... 3,669,978 200,793 --
Minnesota Fund........................ 1,317,567 82,163 --
Ohio Fund............................. 2,206,639 124,260 --
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
The Arizona and Florida Funds and Class I and Class II of the remaining Funds
have separate distribution plans or "Rule 12b-1 plans" that were adopted
pursuant to Rule 12b-1 of the 1940 Act.
ARIZONA AND FLORIDA PLANS. Under their plans, the Arizona and Florida Funds
may each pay up to a maximum of 0.15% per year of their average daily net
assets, payable quarterly, for expenses incurred in the promotion and
distribution of their shares.
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. When the Fund reaches $4 billion in assets, the
amount to be paid to Distributors will be reduced from 0.02% to 0.01%. 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.
ALL 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 under the rules of
the NASD.
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 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 by
vote of a majority of the outstanding shares of the class. The Arizona and
Florida plans may also be terminated by any act that constitutes an
assignment of the underwriting agreement with Distributors. 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 28, 1997, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans shown and the amounts the Fund paid
Distributors under the plans were as follows:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID
EXPENSES BY FUND
- ------------------------------------------------------------------------------
Arizona Fund ....................... $ 50,412 $ 33,900
Florida Fund ....................... 86,299 63,539
Insured Fund
- Class II ........................ 170,030 89,655
Massachusetts Fund -
Class I ........................... 244,934 184,149
Massachusetts Fund -
Class II .......................... 34,453 31,713
Michigan Fund
- Class II......................... 168,174 77,360
Minnesota Fund -
Class II .......................... 41,906 16,094
Ohio Fund - Class II ............... 134,883 64,368
For the same period, the total amounts paid pursuant to the remaining plans,
which amounts equaled Distributors' eligible expenditures, and how the
payments were used are shown below:
<TABLE>
<CAPTION>
PRINTING AND
MAILING OF
PROSPECTUSES
AMOUNT OTHER THAN PAYMENTS
PAID TO CURRENT PAYMENTS TO TO BROKERS-
BY FUND ADVERTISING SHAREHOLDERS UNDERWRITERS DEALERS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insured Fund - Class I .......$1,282,318 $123,893 $113,359 $72,643 $972,423
Michigan Fund - Class I ...... 871,863 64,753 77,787 54,462 674,861
Minnesota Fund - Class I..... 373,515 29,181 35,026 20,858 288,450
Ohio Fund - Class I ......... 544,602 41,735 46,981 40,167 415,719
</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. Average annual total return and current yield 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 does not guarantee
future results, and 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-, ten-year and from
inception periods 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-,
ten-year and from inception 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.
When considering the average annual total return quotations, you should keep
in mind that the maximum front-end sales charge reflected in each quotation
is a one time fee charged on all direct purchases, which will have its
greatest impact during the early stages of your investment. This charge will
affect actual performance less the longer you retain your investment in the
Fund. The average annual total return for each class for the indicated
periods ended February 28, 1997, was as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona Fund ........................... 04/30/93 1.06% --% --% 5.01%
Florida Fund ........................... 04/30/93 0.75 -- -- 4.01
Insured Fund - Class I ................. 04/03/85 0.46 6.01 6.48 8.13
Insured Fund - Class II................. 05/01/95 2.43 -- -- 5.75
Massachusetts Fund - Class I ........... 04/03/85 0.27 6.00 6.19 7.35
Massachusetts Fund - Class II........... 05/01/95 2.18 -- -- 5.68
Michigan Fund - Class I ................ 04/03/85 0.42 6.09 6.39 7.73
Michigan Fund - Class II ............... 05/01/95 2.43 -- -- 5.90
Minnesota Fund - Class I ............... 04/03/85 0.09 5.58 6.10 7.74
Minnesota Fund - Class II .............. 05/01/95 1.98 -- -- 5.17
Ohio Fund - Class I .................... 04/03/85 0.89 6.11 6.42 7.78
Ohio Fund - Class II ................... 05/01/95 2.79 -- -- 6.01
</TABLE>
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-, ten-year or from inception periods at
the end of the one-, five-, ten-year or from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return 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. Cumulative total return, however, will be
based on the actual return for each class for a specified period rather than
on the average return over one-, five-, ten-year and from inception periods.
The cumulative total return for each class for the indicated periods ended
February 28, 1997, was as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona Fund............................ 04/30/93 1.06% --% --% 20.64%
Florida Fund ........................... 04/30/93 0.75 -- -- 16.29
Insured Fund - Class I ................. 04/03/85 0.46 33.88 87.41 153.92
Insured Fund - Class II ................ 05/01/95 2.43 -- -- 10.81
Massachusetts Fund - Class I ........... 04/03/85 0.27 33.80 82.28 132.56
Massachusetts Fund - Class II .......... 05/01/95 2.18 -- -- 10.68
Michigan Fund - Class I ................ 04/03/85 0.42 34.41 85.84 142.82
Michigan Fund - Class II ............... 05/01/95 2.43 -- -- 11.09
Minnesota Fund - Class I ............... 04/03/85 0.09 31.18 80.79 143.06
Minnesota Fund - Class II .............. 05/01/95 1.98 -- -- 9.69
Ohio Fund - Class I .................... 04/03/85 0.89 34.54 86.38 144.21
Ohio Fund - Class II ................... 05/01/95 2.79 -- -- 11.31
</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 February 28, 1997, was as follows:
YIELD
CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund ........... 4.92% --%
Florida Fund ........... 5.04 --
Insured Fund ........... 4.44 4.00
Massachusetts Fund...... 4.43 4.01
Michigan Fund .......... 4.51 4.09
Minnesota Fund ......... 4.49 4.07
Ohio Fund ............. 4.53 4.10
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 federal or
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
28, 1997, was as follows:
TAXABLE-
EQUIVALENT YIELD
-----------------
CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund ........... 8.63% --%
Florida Fund ........... 8.34 --
Insured Fund ........... 7.35 6.62
Massachusetts Fund ..... 8.33 7.54
Michigan Fund .......... 7.81 7.08
Minnesota Fund ........ 8.12 7.36
Ohio Fund ............. 8.11 7.34
As of February 28, 1997, the federal and combined federal and state income
tax rates upon which the taxable-equivalent yield quotations are based were
as follows:
COMBINED RATE*
- ------------------------------------------------------------------------------
Arizona ...................... 42.98%
Florida ...................... 39.60
Insured ...................... 39.60
Massachusetts ................ 46.85
Michigan ..................... 42.26
Minnesota .................... 44.73
Ohio ......................... 43.83
*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 the federal and state 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.
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 28, 1997, was as follows:
CURRENT
DISTRIBUTION RATE
CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund ........... 5.10% --%
Florida Fund ........... 5.06 --
Insured Fund ........... 5.39 4.95
Massachusetts Fund ..... 5.18 4.77
Michigan Fund .......... 5.27 4.79
Minnesota Fund ........ 5.12 4.57
Ohio Fund .............. 5.18 4.76
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
and state tax rates available to the Fund. The taxable-equivalent
distribution rate for each class for the 30-day period ended February 28,
1997, was as follows:
TAXABLE-
EQUIVALENT
DISTRIBUTION RATE
CLASS I CLASS II
- ------------------------------------------------------------------------------
Arizona Fund ........... 8.94% --%
Florida Fund ........... 8.38 --
Insured Fund ........... 8.92 8.20
Massachusetts Fund ..... 9.74 8.97
Michigan Fund .......... 9.13 8.30
Minnesota Fund ......... 9.35 8.26
Ohio Fund .............. 9.27 8.52
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
The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising 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 Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin 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) 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, and 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) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
j) 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 sales material issued by the Fund may also 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.
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
- ------------------------------------------------------------------------------
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.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. 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 49 years and
now services more than 2.7 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $191 billion in
assets under management for more than 5.2 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 122
U.S. based open-end investment companies 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 $44 billion in municipal bond assets for over three quarters of a
million investors. Franklin's municipal research department is one of the
largest in the industry. 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.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1997, 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 1997.) 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 the Fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectus, shares of the Fund are generally
sold through Securities Dealers. Investment representatives of such
Securities Dealers 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.
Franklin had the first single-state municipal bond funds in Massachusetts,
Michigan, Minnesota and Ohio.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past nine years.
As of June 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
MASSACHUSETTS
FUND - CLASS II
Julian Soshnick &
Martha Soshnick JT TEN 57,154.222 8.9%
67 Winthrop St.
Charlestown, MA 02129
Maurice Vaughn 54,329.156 8.4%
7971 Park Dr.
Fall Oaks, CA 95628
MINNESOTA FUND -
CLASS II
Leroy I. Peterson 29,210.410 5.7%
RR 5 Box 527
Detroit Lakes, MN 56501
Industricorp & Co. Inc. 57,471.264 11.2%
FBO 19-2996-00
312 Central Ave Ste 508
Minneapolis, MN 66525
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.
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,
before 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.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the
day clearance is granted; (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.
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended February 28, 1997,
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 - Each Fund, except the Arizona and Florida Funds,
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.
Shares of the Arizona and Florida Funds 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
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
NYSE - New York Stock Exchange
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, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
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 other
wholly owned subsidiaries 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 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 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: 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.
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 therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
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 signs
are not used with the AAA, 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
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, CDs, 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 an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-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.
STATE RISK FACTORS
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The following information is provided in light of the Fund's policy of
investing primarily in municipal securities issued by or on behalf of its
respective state, and that state's local governments, municipalities,
authorities, agencies and political subdivisions. It is not a complete
analysis of every material fact that may affect the ability of issuers of
municipal securities in the Fund's respective state to meet their debt
obligations or the economic or political conditions within the state. It is
based on information available to the Fund as of the date of this SAI and on
historically reliable sources, including periodic publications by national
rating services, but it has not been independently verified by the Fund.
ARIZONA
Arizona has relied principally on lease obligations, revenue bonds, and
pay-as-you-go financing for its capital needs. A significant portion of the
state's debt is supported by motor fuel taxes and highway user fees.
During the 1980s, Arizona's per capita expenditures, which had been below the
national average, climbed to 105% of the U.S. average. At the same time, the
state implemented various tax cuts. Together, these two factors drained the
state's cash reserves, and its general fund balance fell from 21% of
expenditures to 0%. 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 internal borrowings.
Recently, strong economic growth has enabled the state to replenish its
general fund, which had a balance of 6.9% of expenditures by the end of
fiscal 1995. The state's budget stabilization fund is also fully funded as of
July 1996, which may help provide protection in an economic downturn.
Arizona's economy has diversified in recent years and has continued its shift
away from agriculture and mining and towards manufacturing and services. The
move away from farming, which consumes about 80% of the water used in the
state, may increase the water available for municipal uses. Manufacturing
recently accounted for approximately 9.2% of the state's total employment,
trade 22.7%, services 30.2%, government 14.0%, construction 5.8%, and
finance-insurance-real estate 8.6%. While the state experienced some job
losses during the national recession in the early 1990s, its economy fared
better than the nation as a whole, and it has since recovered its losses.
FLORIDA
Florida's overall economic performance has continued to exceed national
levels. The state's services, construction and trade sectors accounted for
82% of all new employment between 1993 and 1996, and recently comprised over
64% of the state's labor force. Florida's tourism industry, which supports
the state's other employment sectors, has been somewhat erratic since the
recession in the early 1990s. A tourism increase of 3.2% is expected,
however, through fiscal 1998. Overall, employment is expected to grow at an
annual rate of 2.5% through 2001, a rate which would rank Florida third in
the nation.
Due in large part to the state's healthy economy, Florida's population has
also continued to grow. It is now the fourth most populated state in the U.S.
Its per capita income, while close to the national average, exceeded regional
levels by almost 11% as of April 1997. Because of its substantial retirement
age population, however, its income structure is dependent on property income
and transfer payments, such as social security and pension benefits. As a
result, a change to the consumer price index at the federal level could have
a significant impact on the state. For fiscal 1998, personal income growth is
anticipated to be around 4%, compared with 2.3% for the nation.
Florida's tax base has remained relatively narrow, with 70% of its revenues
derived from the 6% sales and use tax. This reliance on a cyclical revenue
source creates some vulnerability, as does the constitutional amendment
approved by voters in 1994 that limits the rate of growth in state revenues.
In recent years, however, the state has generated operating surpluses, while
maintaining tax levels and providing funds for the state's growth in
government services. The state is expected to end fiscal 1997 with its
highest reserve level in more than a decade, and forecasts for fiscal 1998
indicate a margin of more than $700 million under the constitutional revenue
limitation.
MASSACHUSETTS
Despite continuing efforts to restore fiscal control, Massachusetts' debt
service remains among the highest in the nation. As of March 1997, debt per
capita was $2,192, the third highest among the states, and debt as a
percentage of personal income was 7.8%, the fourth highest rate in the U.S.
Spending disciplines imposed during the state's severe financial difficulties
in the early 1990s have begun to help. Over the past six years, Massachusetts
has had balanced financial operations and has greatly reduced its reliance on
temporary borrowing. In fiscal 1996, the general fund balance grew to $123
million, up from the $25 million deficit at the end of fiscal 1995.
Although the state has regained some control over its budget, continuing
expenditure pressures will present fiscal challenges. After a period of
restrained debt issuance, pressure to increase borrowing has been building.
Funding for routine infrastructure needs and two major projects, namely a
costly tunnel and a proposed convention center, have been the focus of this
pressure. The state's unfunded pension liability is also substantial.
Overall, however, the state's credit standing is considered above-average.
MICHIGAN
Since the early 1990s when the state's financial position was weakened by the
national recession and imbalances in the budget, Michigan's economy has
sustained steady growth. Despite an increase in the size of its labor force,
Michigan's unemployment level is at its lowest level since the 1960s and is
below the national average. Per capita personal income levels are also better
than the national level for the first time since 1986.
Michigan's fiscal position has also improved. The state's budget
stabilization fund was estimated to be more than $1 billion at September 30,
1996, the highest level in the state's history. Michigan may need the
increased stability these reserve levels provide in order to offset higher
school funding requirements. In 1993, property tax reforms eliminated all
school operating property taxes. To maintain school operating budgets, voters
approved a school funding initiative in 1994 aimed at providing replacement
funding. As a result, the state is now responsible for funding a considerably
larger portion of local school district operations. In fiscal 1994, the
state's expenditures from the school aid fund were $4.2 billion. By fiscal
1996, these expenditures were estimated at more than $8 billion. School
funding reform, coupled with the state's increasing unfunded pension
liabilities, may present potential areas of financial stress that will need
to be addressed in the near future.
MINNESOTA
Minnesota's financial management has been historically strong. During the
recession of the early 1990s, however, the state experienced budget
shortfalls, which it closed by depleting its budget stabilization fund,
raising its sales tax by a half-cent, reducing spending, and establishing
budgetary controls. As a result of recent improvements in the state's economy
and growing revenues, the state anticipates that it will have restored its
general fund balance to an estimated $1.3 billion by the end of June 1997,
with an estimated $604 million in its budget stabilization and cash flow
funds. In the coming years, key spending areas for the state are expected to
include corrections, human services, higher education and facilities for
general government.
Minnesota's strong employment growth has continued, with growth in 1997
estimated at 1.7%. This figure is down slightly from 1996 levels but is still
close to the national rate. The state's employment mix also approximates the
composition of the U.S. labor force, with services totaling 27% of
employment, trade 23%, and durable and nondurable goods manufacturing at 16%.
Minnesota's most important manufacturing sectors have included natural
resource-related manufacturing, food processing, paper and computers.
Computer manufacturing recently accounted for 33% of the state's durable
goods production. Minnesota's estimated unemployment level of 3.6% for 1996
was below the national average of 5.4%.
OHIO
Ohio's direct debt levels have been moderate. As a result, debt service
payments on its general obligation debt and lease obligations have been
manageable, accounting for less than 5% of expenditures. At June 30, 1996,
the state's combined reserves in its general and budget stabilization funds
were more than $1.6 billion, with no reductions in reserves expected in 1997.
Current estimations show balanced operations for fiscal 1997, including
estimated increases in spending of 15.4% for primary and secondary education,
9.5% for human services, and 13.1% for higher education. According to Ohio's
capital budget, the state expects to issue new debt totaling $3 billion over
the next four years to fund schools, prisons, parks, and natural resource
facilities.
The state's relatively large manufacturing sector has been cyclical,
accounting for nearly 60% of the state's job losses during the recession of
the early 1990s. Recently, however, Ohio's export activity has been strong,
particularly with respect to transportation equipment and nonelectrical
machinery. The strength of its exports may help lessen some of the state's
vulnerability to manufacturing losses during national recessions. While
employment has been growing steadily, the rate of growth slowed in 1996,
primarily due to slower growth in the automotive manufacturing area.
Additional losses in manufacturing are expected through 1998, although total
employment is estimated to grow at a rate of 1% a year. Losses in
manufacturing are expected to slow personal income growth, with personal
income levels already slightly below the national average. The state's
unemployment rate, 4.7% in October 1996, is expected to remain below the
national rate.
STATE TAX TREATMENT
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The following information on the state income tax treatment of dividends from
the Fund 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.
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.), 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 later 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 that is taxable under Florida's
intangible tax law, including investments in indirect federal obligations
(GNMAs, FNMAs, etc.) or obligations of any other states, then only the
portion of Net Asset Value if any that is made up of direct obligations of
the U.S. government, or territories and possessions of the U.S. government,
may be excluded from the Net Asset Value as being exempt from tax. 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.) 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 capital gains earned by the Fund that are
derived from obligations issued by Massachusetts or its political
subdivisions, or any of their agencies or instrumentalities is exempt from
Massachusetts income tax. Any distributions of net long-term capital gains
earned by the Fund from obligations described above will also be exempt from
Massachusetts income tax so long as such dividends are identified in a
written notice to shareholders not later than 60 days after the close of the
Fund's tax year. Distributions by the Fund from sales of obligations other
than those listed above will be taxable as follows: Net short-term capital
gain distributions will be taxable as dividend income while net long-term
capital gain distributions will be taxable at reduced rates from zero to five
percent based upon the applicable holding period of the asset as determined
under Massachusetts law.
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 corporations that are
defined as "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.) 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 Michigan tax return instructions, 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. In 1995, legislation was passed repealing this intangible personal
property tax effective January 1, 1998.
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.) 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 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.)
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 Ohio taxable income as dividend
income and long-term capital gain, respectively, and are taxed at ordinary
income tax rates.
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
JULY 1, 1997
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TABLE OF CONTENTS
How does the Fund Invest its Assets? ............. 2
Investment Restrictions .......................... 4
Officers and Trustees ............................ 5
Investment Management
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 ............................. 23
Useful Terms and Definitions ..................... 23
Appendices
Description of Ratings .......................... 24
State Risk Factors .............................. 27
State Tax Treatment ............................. 30
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- ------------------------------------------------------------------------------
This SAI describes the ten series of Franklin Tax-Free Trust (the "Trust"), an
open-end management investment company, listed below. Each series may
individually or together be referred to as the "Fund(s)."
Franklin AlabamaTax-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
The Fund's investment objective is to provide investors with as high a
level of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The 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 Fund seeks to achieve its objective by investing primarily in municipal
securities issued by or on behalf of its respective state and that state's local
governments, municipalities, authorities, agencies and political subdivisions.
The Prospectus, dated July 1, 1997, 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.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
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The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
All of the Funds, except the Maryland Fund, are diversified series of the Trust.
The Maryland Fund is a non-diversified series. As a fundamental policy, none of
the diversified Funds will buy a security if, with respect to 75% of its net
assets, more than 5% 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, 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 is considered a separate issuer.
Escrow-secured or defeased bonds, described below, are not generally considered
an obligation of the original municipality when determining diversification.
Please see "Investment Restrictions" for the diversification requirements the
Maryland Fund intends to meet.
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
The Prospectus contains a general description of municipal securities. The
following provides more detailed information about the various municipal and
other securities in which the Fund may invest. There may be other types of
municipal securities that become available that are similar to those described
below and in which the Fund may also invest, if consistent with its investment
objectives and policies.
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 the receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Program.
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. This typically represents a short-term
obligation (270 days or less) issued by a municipality to meet working capital
needs.
MUNICIPAL BONDS. These meet longer-term capital needs and generally have
maturities of more than one year when issued. They 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. 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. Revenue bonds are not secured by the full faith, credit and
taxing power of the 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 that may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided 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
facility or other personal property as security for payment.
FLOATING OR VARIABLE RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations with a floating or variable interest rate. They have 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, before specified dates. The payment may be received either from the issuer
or by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the note. The interest rate is adjustable at intervals ranging from
daily up to monthly, and is calculated to maintain the market value of the VRDN
at approximately its par value upon the adjustment date.
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently issued on a
"when-issued" basis. When so issued, 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 assets of the Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income on those assets. It is the Fund's intention, however, to be
fully invested to the extent practicable and consistent with its investment
policies. When the Fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The Fund believes that its
Net Asset Value or income will not be adversely affected by its purchase of
municipal securities on a when-issued basis.
CALLABLE BONDS. Callable bonds allow the issuer to redeem the bonds before their
maturity dates. To protect bondholders, however, callable bonds may be issued
with provisions that prevent them from being called for a period of time,
typically five to ten years from the date of issue. During times of generally
declining interest rates, if the call-protection on a callable bond expires,
there is an increased likelihood that the bond may be called by the issuer.
Advisers may sell a callable bond before its call date, if it believes the bond
is at its maximum premium potential.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on the Fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by Advisers, the Fund
believes it has reduced the risk of an adverse impact on its Net Asset Value
based on calls of callable bonds. In light of the Fund's pricing policies and
because the Fund follows certain amortization procedures required by the IRS,
the Fund is not expected to suffer any material adverse impact related to the
value at which the Fund has carried the bonds in connection with calls of bonds
purchased at a premium. Notwithstanding these policies, however, the
reinvestment of the proceeds of any called bond may be in bonds that pay a 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.
ESCROW-SECURED 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 uses 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 often receive a triple A or
equivalent rating from Moody's, S&P or Fitch.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on the municipal securities.
ZERO-COUPON SECURITIES. The Fund may invest in zero-coupon and delayed interest
securities. Zero-coupon securities make no periodic interest payments, but are
sold at a deep discount from their face value. The buyer recognizes a rate of
return determined by the gradual appreciation of the security, which is redeemed
at face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as 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 date approaches. If the issuer defaults, the Fund may not
obtain any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value 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 the value
of 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.
The Fund's investment in zero-coupon and delayed interest securities may cause
the Fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. In order to generate cash to
satisfy distribution requirements, the Fund may be required to sell portfolio
securities that it otherwise may have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds 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 when the security is
issued.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). The Board
reviews COPs held in the Fund's portfolio to assure that they are 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 to invest, 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 securities of comparable
credit rating or quality.
U.S. GOVERNMENT OBLIGATIONS. These are issued by the U.S. Treasury or by
agencies and instrumentalities of the U.S. government and are backed by the full
faith and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER. This refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
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
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
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 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.
INVESTMENT RESTRICTIONS
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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 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 with respect to the Maryland
Fund, which will not purchase a security, if as a result: i) more than 25% of
its total assets would be invested in the securities of a single issuer or ii)
with respect to 50% of its total assets, more than 5% of its assets would be
invested in the securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment advisor 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 Templeton 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 the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
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The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund 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
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment
company); and director or trustee, as the case may be, of 29
of the investment companies in the Franklin Templeton Group
of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and
director or trustee, as the case may be, of 53 of the investment companies
in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
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, General Host Corporation (nursery and craft
centers); and director or trustee, as the case may be, of 55
of the investment companies in the Franklin Templeton Group
of Funds.
David W. Garbellano (82)
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 or trustee,
as the case may be, of 28 of the investment companies in the Franklin
Templeton Group of Funds.
* Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 54 of the investment companies in the Franklin
Templeton Group of Funds.
- -
* Rupert H. Johnson, Jr. (56)
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.; Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 58 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye (68)
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 Corporation
(software firm); Director, Fischer Imaging Corporation (medical imaging
systems) and Digital Transmission Systems, Inc. (wireless communications);
and director or trustee, as the case may be, of 27 of the investment
companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping) and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 50 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52)
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. and Franklin Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Mutual Advisers, Inc.; and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and 58 of the investment companies in the Franklin
Templeton Group of Funds.
Don Duerson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Vice President, Franklin Advisers, Inc.; and officer of one investment
company in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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.; Director and Executive Vice President, Templeton
Worldwide, Inc.; Director, Executive Vice President and Chief Operating
Officer, Templeton Investment Counsel, Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.; Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of 58 of the investment companies
in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 58 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (34)
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 Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton 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 or trustees 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 FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
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Frank H. Abbott, III ......$29,900 $165,236 29
Harris J. Ashton ......$29,900 $343,591 53
S.Joseph Fortunato ......$29,900 $360,411 55
David W. Garbellano ......$28,600 $148,916 28
Frank W.T.LaHaye ......$29,900 $139,233 27
Gordon S. Macklin ......29,900 $335,541 50
*For the fiscal year ended February 28, 1997.
**For the calendar year ended December 31, 1996.
***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 59 registered investment companies, with approximately 167 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 or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. 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, 1997, the officers and Board members did not own of record or
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT 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 and its officers,
directors and employees are covered by fidelity insurance for the protection of
the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. 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. 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. Please
see "Miscellaneous Information - Summary of 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% of the value of its net
assets up to and including $100 million; and 1/24 of 1% of the value of its net
assets over $100 million up to and including $250 million; and 9/240 of 1% of
the value of its net assets in excess of $250 million. The fee is computed at
the close of business on the last business day of each month. Each class pays
its proportionate share of the management fee. The table below shows the
management fees paid by the Fund for the fiscal years ended February 28, 1995,
February 29, 1996 and February 28, 1997.
MANAGEMENT FEES PAID
1997 1996 1995
- --------------------------------------------------------------------------
Alabama
Fund........ $1,079,285 $1,025,448 $ 969,002
Florida
Fund........ 6,567,507 6,180,348 5,976,798
Georgia
Fund........ 812,505 744,453 703,628
Kentucky
Fund........ 66,255* 49,195* 34,216*
Louisiana
Fund........ 692,158 655,033 661,267
Maryland
Fund ........ 1,033,178 954,307 877,941
Missouri
Fund........ 1,416,882 1,318,581 1,246,460
North
Carolina
Fund........ 1,410,760 1,292,366 1,181,708
Texas
Fund........ 762,188 776,321 804,364
Virginia
Fund........ 1,519,947 1,441,960 1,385,287
*For the fiscal years ended February 28, 1995, February 29, 1996 and February
28, 1997, management fees, before any advance waiver, totaled $190,072, $223,931
and $260,610, respectively. Under and agreement by Advisers to limit its fees,
the Kentucky Fund paid the management fees shown.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1998. 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.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
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.
CUSTODIAN. 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. The custodian does 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 28, 1997, 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 28, 1997.
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 Advisers receives 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 staffs 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, as well as shares of other funds in the Franklin Templeton Group of
Funds, 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, 1995, February 29, 1996 and February
28, 1997, the Fund paid no brokerage commissions.
As of February 28, 1997, 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 may 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 to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million. These
breakpoints are reset every 12 months for purposes of additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they 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 before 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 before 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day for Class I shares and on the prior
business day for Class II shares. If the processing dates are different, the
date of the Net Asset Value used to redeem the shares will also be different for
Class I and Class II shares.
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. 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.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- -----------------------------------------------------------------------------
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
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. In the absence of a sale or reported bid and ask
prices, information with respect to bond and note transactions, quotations from
bond dealers, market transactions in comparable securities, and various
relationships between securities are used to determine the value of municipal
securities.
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 NYSE. 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 NYSE 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 capital loss carryforward or post-October
loss deferral) may generally be made twice each year, once in December and once
following the end of the Fund's fiscal year. These distributions, when made,
will generally be fully taxable to the Fund's shareholders. The Fund may adjust
the timing of these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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
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 12 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. The Fund intends, as a matter of policy, to
declare and pay these dividends, if any, in December to avoid the imposition of
this tax, but can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation, gain
or loss will be recognized in an amount equal to the difference between your
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If you hold your shares as a capital asset, gain or loss
realized will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any long-term capital gains distributed to you from your investment in the Fund
and will be disallowed to the extent of exempt-interest dividends paid to you
with respect to such shares.
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 the sales proceeds are reinvested 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.
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 the fund. Investments in GNMA/FNMA securities and commercial paper do
not generally qualify for tax-free treatment. To the extent that such
investments are made, the Fund will provide you with the percentage of any
dividends paid that 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 on the
application of other state and local laws on distributions and redemption
proceeds received from the Fund. For more information, please see "Appendices -
State Tax Treatment."
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, Distributors acts as principal
underwriter in a continuous public offering for each class 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.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after allowances
to dealers, and the amounts received by Distributors in connection with
redemptions or repurchases of shares for the fiscal years ended February 28,
1995, February 29, 1996 and February 28, 1997.
<TABLE>
<CAPTION>
AMOUNT RECEIVED
TOTAL AMOUNT IN CONNECTION
COMMISSIONS RETAINED BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
- ----------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C>
Alabama Fund ............................. $ 714,659 $ 46,026 $ 859
Florida Fund ............................. 4,989,349 320,319 13,709
Georgia Fund ............................. 589,639 36,558 688
Kentucky Fund ............................ 263,208 16,972 --
Louisiana Fund ........................... 503,212 30,444 5,331
Maryland Fund ............................ 925,907 55,499 2,211
Missouri Fund ............................ 1,133,635 71,462 2,759
North Carolina Fund ...................... 1,199,579 73,060 1,322
Texas Fund ............................... 254,884 16,652 16
Virginia Fund ............................ 1,202,582 76,437 1,039
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 --
</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
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted 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.
When the Fund reaches $4 billion in assets, the amount to be paid to
Distributors will be reduced from 0.02% to 0.01%. 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.
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 under the rules of
the NASD.
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 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 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 28, 1997, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the Fund paid Distributors under the plans
were as follows:
<TABLE>
<CAPTION>
CLASS I CLASS II
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTORS' AMOUNT DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY ELIGIBLE PAID BY
EXPENSES FUND EXPENSES FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama Fund ...................... $ 156,493 $ 152,513 $ 53,669 $22,038
Florida Fund ...................... 1,130,315 1,117,185 190,959 89,684
Georgia Fund ...................... 118,604 109,800 44,456 17,885
Kentucky Fund ..................... 41,113 35,208 -- --
Louisiana Fund .................... 92,538 88,822 33,046 15,542
Maryland Fund ..................... 158,239 152,763 56,570 16,015
Missouri Fund ..................... 217,308 206,119 44,539 16,192
North Carolina Fund ............... 217,070* 217,070* 90,669 42,851
Texas Fund ........................ 100,634 99,432 8,366 2,177
Virginia Fund ..................... 228,484 224,522 54,340 26,218
</TABLE>
*For the fiscal year ended February 28, 1997, the total amount paid pursuant to
the North Carolina Fund's Class I plan, which amount equaled Distributors'
eligible expenditures, was used for advertising ($15,155), printing and mailing
of prospectuses other than to current shareholders ($21,348), payments to
underwriters ($20,194) and payments to brokers-dealers ($160,373).
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.
Average annual total return and current yield 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 does not guarantee future results, and 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-year and from
inception periods 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-year
and from inception 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.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
average annual total return for each class for the indicated periods ended
February 28, 1997, was as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------------------------------------------------------------------
INCEPTION ONE- FIVE- FROM
DATE YEAR YEAR INCEPTION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama Fund - Class I ......................... 09/01/87 1.35% 6.37% 7.54%
Alabama Fund - Class II ........................ 05/01/95 3.23 -- 6.63
Florida Fund - Class I ......................... 09/01/87 0.72 6.31 7.78
Florida Fund - Class II ........................ 05/01/95 2.61 -- 6.28
Georgia Fund - Class I ......................... 09/01/87 0.97 6.14 7.54
Georgia Fund - Class II ........................ 05/01/95 2.93 -- 6.07
Kentucky Fund .................................. 10/12/91 1.36 6.61 6.71
Louisiana Fund - Class I ....................... 09/01/87 1.46 5.94 7.43
Louisiana Fund - Class II ...................... 05/01/95 3.27 -- 6.47
Maryland Fund - Class I ........................ 10/03/88 0.73 6.36 7.08
Maryland Fund - Class II ....................... 05/01/95 2.60 -- 6.83
Missouri Fund - Class I ........................ 09/01/87 0.59 6.40 7.56
Missouri Fund - Class II ....................... 05/01/95 2.30 -- 6.41
North Carolina Fund - Class I .................. 09/01/87 0.91 6.00 7.50
North Carolina Fund - Class II ................. 05/01/95 2.78 -- 6.20
Texas Fund - Class I ........................... 09/01/87 1.36 6.20 7.69
Texas Fund - Class II .......................... 05/01/95 3.43 -- 6.84
Virginia Fund - Class I ........................ 09/01/87 0.68 6.23 7.58
Virginia Fund - Class II ....................... 05/01/95 2.57 -- 6.28
</TABLE>
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-year or from inception periods at the end
of the one-, five-year or from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return 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. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five-year or from inception periods. The cumulative
total return for each class for the indicated periods ended February 28, 1997,
was as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------------------------------------------------------
INCEPTION ONE- FIVE- FROM
DATE YEAR YEAR INCEPTION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama Fund - Class I ......................... 09/01/87 1.35% 36.16% 99.49%
Alabama Fund - Class II ........................ 05/01/95 3.23 -- 12.50
Florida Fund - Class I ......................... 09/01/87 0.72 35.79 103.81
Florida Fund - Class II ........................ 05/01/95 2.61 -- 11.83
Georgia Fund - Class I ......................... 09/01/87 0.97 34.71 99.52
Georgia Fund - Class II ........................ 05/01/95 2.93 -- 11.43
Kentucky Fund .................................. 10/12/91 1.36 37.71 41.93
Louisiana Fund - Class I ....................... 09/01/87 1.46 33.43 97.63
Louisiana Fund - Class II ...................... 05/01/95 3.27 -- 12.19
Maryland Fund - Class I ........................ 10/03/88 0.73 36.11 77.76
Maryland Fund - Class II ....................... 05/01/95 2.60 -- 12.90
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
- ----------------------------------------------------------------------------------------------------------------
INCEPTION ONE- FIVE- FROM
DATE YEAR YEAR INCEPTION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Missouri Fund - Class I ........................ 09/01/87 0.59% 36.35% 99.95%
Missouri Fund - Class II ....................... 05/01/95 2.30 -- 12.08
North Carolina Fund - Class I .................. 09/01/87 0.91 33.84 98.88
North Carolina Fund - Class II ................. 05/01/95 2.78 -- 11.68
Texas Fund - Class I ........................... 09/01/87 1.36 35.06 102.16
Texas Fund - Class II .......................... 05/01/95 3.43 -- 12.92
Virginia Fund - Class I ........................ 09/01/87 0.68 35.25 100.18
Virginia Fund - Class II ....................... 05/01/95 2.57 -- 11.83
</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 February 28, 1997, was as follows:
YIELD
- -----------------------------------------------------------------------------
CLASS I CLASS II
- -----------------------------------------------------------------------------
Alabama Fund ...................... 4.79% 4.35%
Florida Fund ...................... 4.78 4.37
Georgia Fund ...................... 4.42 4.00
Kentucky Fund ..................... 5.17 --
Louisiana Fund .................... 4.78 4.33
Maryland Fund ..................... 4.66 4.20
Missouri Fund ..................... 4.71 4.25
North Carolina Fund ............... 4.68 4.27
Texas Fund ........................ 4.63 4.20
Virginia Fund ..................... 4.68 4.22
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
February 28, 1997, was as follows:
TAXABLE-
EQUIVALENT YIELD
- ----------------------------------------------------------------------------
CLASS I CLASS II
- ----------------------------------------------------------------------------
Alabama Fund ...................... 8.34% 7.58%
Florida Fund ...................... 7.91 7.24
Georgia Fund ...................... 7.78 7.04
Kentucky Fund ..................... 9.10 --
Louisiana Fund .................... 8.42 7.62
Maryland Fund ..................... 8.34 7.51
Missouri Fund ..................... 8.29 7.48
North Carolina Fund ............... 8.40 7.66
Texas Fund ........................ 7.67 6.95
Virginia Fund ..................... 8.22 7.42
As of February 28, 1997, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations are based was as follows:
COMBINED
RATE*
- -------------------------------------------------------------------------
Alabama .................................. 42.62%
Florida .................................. 39.60
Georgia .................................. 43.22
Kentucky ................................. 43.22
Louisiana ................................ 43.22
Maryland ................................. 44.13**
Missouri ................................. 43.22
North Carolina ........................... 44.28
Texas .................................... 39.60
Virginia ................................. 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.
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 and state 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.
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
28, 1997, was as follows:
CURRENT
DISTRIBUTION RATE
- ----------------------------------------------------------------------------
CLASS I CLASS II
- ----------------------------------------------------------------------------
Alabama Fund ...................... 5.39% 4.94%
Florida Fund ...................... 5.65 5.33
Georgia Fund ...................... 5.13 4.78
Kentucky Fund ..................... 5.30 --
Louisiana Fund .................... 5.48 4.98
Maryland Fund ..................... 5.27 4.81
Missouri Fund ..................... 5.24 4.78
North Carolina Fund ............... 5.09 4.59
Texas Fund ........................ 5.66 5.20
Virginia Fund ..................... 5.32 4.90
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 and
state tax rates available to the Fund. The taxable-equivalent distribution rate
for each class for the 30-day period ended February 28, 1997, was as follows:
TAXABLE-
EQUIVALENT
DISTRIBUTION RATE
- ---------------------------------------------------------------------------
CLASS I CLASS II
- ---------------------------------------------------------------------------
Alabama Fund ...................... 9.39% 8.61%
Florida Fund ...................... 9.35 8.82
Georgia Fund ...................... 9.04 8.42
Kentucky Fund ..................... 9.33 --
Louisiana Fund ................... 9.65 8.77
TAXABLE-
EQUIVALENT
DISTRIBUTION RATE
- -----------------------------------------------------------------------------
CLASS I CLASS II
- ---------------------------------------------------------------------------
Maryland Fund ..................... 9.43% 8.60%
Missouri Fund ..................... 9.23 8.42
North Carolina Fund ............... 9.14 8.24
Texas Fund ........................ 9.37 8.61
Virginia Fund ..................... 9.35 8.61
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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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) 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, and 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) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
j) 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.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) 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.
m) 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.
n) 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 sales material issued by the Fund may also 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.
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
- ------------------------------------------------------------------------------
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.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. 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 49 years and
now services more than 2.7 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $191 billion in
assets under management for more than 5.2 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 122
U.S. based open-end investment companies 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
$44 billion in municipal bond assets for over three quarters of a million
investors. Franklin's municipal research department is one of the largest in the
industry. 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.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1997, 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 1997).
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
the Fund.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers 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 Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
According to Strategic Insight, dated February 28, 1997, the Florida Fund is the
largest Florida municipal bond fund. The Alabama, Georgia and Missouri Funds are
also the largest municipal bond funds in their respective states. As of June 3,
1997, the principal shareholders of the Fund, beneficial or of record, were as
follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
- -----------------------------------------------------------------------------
GEORGIA FUND - CLASS II
Win Communication Corp......... 21,974.877 5.3%
ATTN: Jim May
6755 Jimmy Carter Blvd.
Norcross, GA 30071-1702
MISSOURI FUND - CLASS II
Alice C. Prewitt ............... 39,904.165 8.6
9 Crabapple Ct.
Olivette, MO 63132
TEXAS FUND - CLASS II
Family LTD Partnership.......... 10,774.557 11.8
Alo Family Limited
4512 Teas St.
Bellaire, TX 77401-4223
Prudential Securities Inc. ..... 9,033.649 9.9
FBO Nina Carr Bondurant
200 Patterson, Apt. 216
San Antonio, TX 78209-6265
Lonnie Kelly & ................. 5,208.877 5.7%
Mary H. Kelly Jt Ten
133 Cattail Creek
Kerrville, TX 78028
J.B. Taylor & .................. 4,771.870 5.2
Joe Bob Taylor Jt Ten
1010 Emerald Isle #124
Dallas, TX 75218
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.
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, before 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.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (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.
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 28, 1997, 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 - Each Fund, except the Kentucky 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. Shares of the Kentucky
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
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund Franklin Templeton Group - Franklin Resources, Inc., a publicly owned
holding company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
NYSE - New York Stock Exchange
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, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
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 other wholly owned
subsidiaries 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 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 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: 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.
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 therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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 signs
are not used with the AAA category.
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
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, CDs, 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 an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-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.
STATE RISK FACTORS
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The following information is provided in light of the Fund's policy of investing
primarily in municipal securities issued by or on behalf of its respective
state, and that state's local governments, municipalities, authorities, agencies
and political subdivisions. It is not a complete analysis of every material fact
that may affect the ability of issuers of municipal securities in the Fund's
respective state to meet their debt obligations or the economic or political
conditions within the state. It is based on information available to the Fund as
of the date of this SAI and on historically reliable sources, including periodic
publications by national rating services, but it has not been independently
verified by the Fund.
ALABAMA
Alabama's fiscal policies have been conservative. Under the state's
constitution, expenditure reductions are required to prevent deficit spending
should the state experience revenue shortfalls. Historically, the state has been
able to balance its financial operations and has not needed to make across the
board cuts since fiscal 1993. The state's efforts to maintain a balanced budget
have been helped by Alabama's recent economic growth and strict cost containment
measures. For example, in fiscal years 1994 and 1995, hiring freezes were
implemented to contain growth in the budget. For fiscal 1997, the governor has
recommended zero net budgetary growth in the general fund. As a result, the
state's total debt service has remained low, at less than 5% of the state's
major expenditures.
Alabama is under a court order to remedy constitutional violations of funding
equity and adequacy in its school systems. The Alabama Special Educational Trust
Fund has been the state's largest operating fund and has been funded primarily
by income, sales and use taxes. To address some of the deficiencies, the
governor has recommended that all new revenue growth in the educational trust go
to K-12 schools and the state has issued revenue bonds totaling $215 million for
capital improvements to its schools. It is not yet known whether these steps
will be sufficient to satisfy the court order.
FLORIDA
Florida's overall economic performance has continued to exceed national levels.
The state's services, construction and trade sectors accounted for 82% of all
new employment between 1993 and 1996, and recently comprised over 64% of the
state's labor force. Florida's tourism industry, which supports the state's
other employment sectors, has been somewhat erratic since the recession in the
early 1990s. A tourism increase of 3.2% is expected, however, through fiscal
1998. Overall, employment is expected to grow at an annual rate of 2.5% through
2001, a rate which would rank Florida third in the nation.
Due in large part to the state's healthy economy, Florida's population has also
continued to grow. It is now the fourth most populated state in the U.S. Its per
capita income, while close to the national average, exceeded regional levels by
almost 11% as of April 1997. Because of its substantial retirement age
population, however, its income structure is dependent on property income and
transfer payments, such as social security and pension benefits. As a result, a
change to the consumer price index at the federal level could have a significant
impact on the state. For fiscal 1998, personal income growth is anticipated to
be around 4%, compared with 2.3% for the nation.
Florida's tax base has remained relatively narrow, with 70% of its revenues
derived from the 6% sales and use tax. This reliance on a cyclical revenue
source creates some vulnerability, as does the constitutional amendment approved
by voters in 1994 that limits the rate of growth in state revenues. In recent
years, however, the state has generated operating surpluses, while maintaining
tax levels and providing funds for the state's growth in government services.
The state is expected to end fiscal 1997 with its highest reserve level in more
than a decade, and forecasts for fiscal 1998 indicate a margin of more than $700
million under the constitutional revenue limitation.
GEORGIA
Once heavily dependent on agriculture, Georgia's economy has become more
diversified. Atlanta, the state's largest city, has an increasingly
service-oriented economy and has been a trade, service and transportation center
for much of the southeast region of the country. Manufacturing, including
textiles, food and paper products, electronic equipment and aircraft, has
predominated in most other cities in Georgia. From 1991 to 1996, Georgia was
ranked sixth in the nation in job growth, with a large portion of the growth
concentrated in business and health services and a smaller portion in
manufacturing. For 1996, total non-farm employment grew 3.7%, compared to 2.0%
for the U.S. As of December 1996, the state's unemployment rate of 4.3% also
compared favorably to the national rate of 5.0%.
Revenues have continued to surpass expectations and have allowed the state to
replenish its reserve funds, which were depleted during the recession in fiscal
years 1990-1992. By the end of fiscal 1996, the state had approximately $313
million in its Revenue Shortfall Reserve, $128 million in the Lottery Reserves,
and $104 million in the Mid-Year Adjustment Reserve. Fiscal 1997 is also
expected to be a strong year, with an anticipated surplus of $476 million.
Georgia has begun to implement a reduction in its sales tax on food that will
impact future revenues. In anticipation of the full implementation of this tax
cut, the state set aside nearly $129 million in fiscal 1996 to help buffer the
tax cut's impact on revenues in future years.
KENTUCKY
Following a 1989 state Supreme Court decision requiring improved funding of the
state's educational system, Kentucky's financial position deteriorated. In
1990-1991, the state raised taxes by more than $1.2 billion to help meet its new
educational funding requirements. By the end of fiscal 1993, the state's general
fund balance was a negative $40 million.
Since fiscal 1993, Kentucky's financial management has steadily improved. At the
end of fiscal 1995, the state's general fund balance was up to $238 million.
Also in 1995, the state funded a $100 million budgetary reserve fund, which by
the end of fiscal 1996 had grown to $200 million. The state is expected to
maintain its reserve fund at this level through fiscal 1998.
Due to Kentucky's manageable debt levels and steady economic growth, its outlook
appears stable. Its employment growth, which has exceeded that of the nation in
recent years, is expected to slow to a more sustainable annual rate of 1.3%
through the year 2000. The state's unemployment rate is also expected to remain
below the national average.
LOUISIANA
During the first half of the 1990s, Louisiana's economy expanded at a healthy
rate, exceeding the job growth rate at the national level. The state has
recovered the jobs it lost during the recession in the 1980s, and population
levels have returned to pre-recession levels. Per capita income has also
improved. In 1994, the state was ranked 44th in per capita income. By the end of
1995 the state had improved to number 40. The state's unemployment rates,
however, have been higher than the national average, at 5.8% in December 1996
compared to 5.0% for the nation.
Louisiana's historically weak budget structure, which has included the lack of a
permanent tax structure to support recurring expenditures, has continued to
result in annual budget gap projections. Nonetheless, the state's relatively
healthy economy has increased revenues, resulting in a general fund surplus in
fiscal 1996. Over the past five years, the general fund balance has grown from a
negative $83 million in 1992 to a positive $318 million in 1996. Balanced
operations are also expected for fiscal 1997. The state's budget may be
strained, however, pending the outcome of a school equity lawsuit, which could
require the state to spend hundreds of millions of dollars annually on public
schools. As of March 1997, this case had been postponed indefinitely.
MARYLAND
Maryland's economic base has been well diversified. Towards the end of 1996, the
state's leading economic sectors were services (31.7%), trade (24.3%), and
government (19.4%). Government employment has been higher in Maryland than in
most other states, recently accounting for close to 20% of the state's personal
income. As a result, federal budget cuts and downsizing have a disproportionate
impact on Maryland's economy, as compared to other states. Maryland's
manufacturing sector has been its most volatile. Despite expansion at regional
and national levels, Maryland's manufacturing sector declined 1.4% in 1995 and
recently accounted for slightly more than 8% of the state's employment.
Like most other states, Maryland's economy suffered during the national
recession in the early years of the 1990s. By the end of fiscal 1992, the
state's general fund had a $121 million deficit. In an effort to solve its
budgetary problems, the state implemented agency expenditure cuts and reduced
local aid. By the end of fiscal 1993, the state had successfully built up its
general fund to a positive $113 million. At the end of fiscal 1996 this amount
had grown to $760 million.
Sales, income and a variety of other taxes have provided about 75% of the
state's revenues, with revenues from the state property tax paying for close to
60% of the state's debt service. A proposed tax cut of 10% over the next three
years could reduce the state's revenues by more than $450 million when fully
implemented. Lost revenues from the proposed tax cut are intended to be replaced
by tapping into the state's reserves, a proposed cigarette tax increase, and new
revenues from economic growth stimulated by the tax cut. At the same time,
spending increases in the areas of education, public safety and business/job
growth are expected. Recently, health and education accounted for nearly
two-thirds of general fund expenditures.
MISSOURI
Missouri's reluctance to rely heavily on borrowing to meet capital needs has
resulted in a low debt burden, while sound financial management has resulted in
a steadily improving financial position. The state's general fund has had a
surplus for five consecutive years, increasing 51% in fiscal 1996 to a balance
of $1.5 billion. Because of constitutional tax limitations, however, the state
must refund $387 million in excess income tax revenues collected in fiscal years
1995 and 1996 to taxpayers.
Fiscal 1997 results are also expected to be positive. Because of the state's
strong economy, current estimates indicate general revenue growth of 5.7%. The
main focus of the fiscal 1997 budget has been education, with a budgeted
increase of $267 million in education funding. For fiscal 1998, the state is
expected to maintain its strong financial position. Expenditures for new prison
construction and the proposed elimination of the state's general sales tax on
food could, however, reduce the state's financial flexibility.
NORTH CAROLINA
Economic growth and conservative budget practices have continued to improve
North Carolina's financial position. From 1990 to 1995, nonfarm jobs grew at an
average annual rate of 2.1%, versus 1.4% for the nation. Personal income per
capita grew 5.8% in 1995, ranking tenth among the states, and 6.9% in 1996. The
state's population has been growing as well. Between 1990 and 1996, population
grew by 10.4%, comparing favorably to the 6.7% increase in population at the
national level.
During the early 1990s, the national recession strained North Carolina's
financial resources. To restore budgetary balance, the state implemented tax
increases and reduced spending. With its recent strong economic performance, the
state has been able to fund various tax cuts while making contributions to its
reserve funds. At the end of fiscal 1996, the state's unreserved general fund
balance was $594 million, up from the fund's $280 million deficit balance at the
end of fiscal 1991. For the fiscal year through January 31, 1997, general fund
revenues were exceeding revenues through the same period last year by 7.8% and
were 2.2% ahead of budget estimates. Expenditures for the same period were also
higher than last year by approximately 5.8%.
TEXAS
The Texas economy has shown steady improvement in recent years, with both
personal income and employment growth exceeding that of the nation. In
particular, manufacturing, especially in the apparel and high technology
industries, has been strong, despite declines at the national level. The state's
construction and financial services industries have also grown, with
construction rebounding from the excess housing supply of the late 1980s and
financial services increasing for the first time since 1986.
The state's financial position has shown signs of improvement as well. Following
budget deficits in the 1980s, Texas increased revenues through additional taxes
and the implementation of a lottery, cutback on spending growth, and
consolidated various funds into the General Revenue Fund. Based on preliminary
results, fiscal 1996 performance exceeded forecasts, resulting in a General
Revenue Fund balance of $2.3 billion. This positive performance was due to
higher-than-anticipated tax revenue growth and lower-than-anticipated
expenditures in health and human services and criminal justice.
The fiscal 1997 budget relies to a certain extent on existing surpluses to fund
expenditures. While the current strength of the Texas economy may help to reduce
some of this need, the use of surpluses could create difficulties in future
years, especially if there is an economic downturn. Additional pressures on the
state's ability to maintain a balanced budget may come from uncertainties
resulting from recent challenges to the state's school finance system, and from
federal reform of both welfare and medical assistance programs.
VIRGINIA
In the past 21/2 years, Virginia has successfully attracted new businesses.
Corporate investments in the state totaled $10 billion during that time, the
highest in the state's history. The largest investment has been a $1 billion
project by Motorola to build a semiconductor plant outside of Richmond.
Production at the Motorola plant is expected to begin in 1998 and may add more
than 5,000 jobs.
In 1993, Virginia created a revenue stabilization fund designed to partially
offset general fund revenue shortfalls. The balance of this reserve fund cannot
exceed 10% of the state's average annual tax revenues over the prior three
years. Initially funded with close to $80 million, the state plans to add almost
$125 million during the 1996-1998 biennium which, together with interest
earnings, will increase the fund's balance to approximately $210 million by June
30, 1998.
For the 1996-1998 biennium, $35 billion in expenditures were approved, with
emphasis on spending for education, public safety and economic development. The
budget includes an increase of $837 million for public and higher education
funding and $77.8 million for juvenile justice reform and improvements to the
juvenile justice corrections system. Preliminary fiscal 1996 results indicate
revenues in excess of budgeted amounts.
Overall, Virginia's outlook is stable, reflecting strong financial management,
continued economic growth, and a low debt burden. Virginia's debt service was
recently less than 3% of operating expenditures.
STATE TAX TREATMENT
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The following information on the state income tax treatment of dividends from
the Fund 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
Under Section 40-18-14(2)f of the Alabama Code, interest on obligations of the
state of Alabama and any of its counties, municipalities or other political
subdivisions is exempt from personal income tax. Section 40-18-14(2)d provides
similar tax-exempt treatment for interest on 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, both 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 the distributions are paid from 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 or obligations of other states and their political
subdivisions. To the extent such investments are made by the Fund, distributions
from those investments 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 later 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 that is taxable under Florida's intangible
tax law, including investments in indirect federal obligations (GNMAs, FNMAs,
etc.) or obligations of any other states, then only the portion of Net Asset
Value, if any, that is made up of direct obligations of the U.S. government, or
territories and possessions of the U.S. government, may be excluded from the Net
Asset Value as being exempt from tax. The remaining Net Asset Value of the Fund
is then 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.) 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 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. Georgia previously imposed an
intangibles tax on shares of corporate stock, including stock of mutual funds.
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.
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.) 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.
Kentucky previously imposed an intangibles tax applicable to shares of corporate
stock, including stock of mutual funds. The intangible property tax has been
declared unconstitutional on a retroactive basis with respect to corporate stock
on January 30, 1997, by the Kentucky Supreme Court decision in St. Ledger, et al
v. Revenue Cabinet.
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 from 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. A specific opinion
may be requested from the Kentucky Revenue Cabinet.
LOUISIANA
Under Section 47:293 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 47:293, 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 47:293, 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.) 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.) 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
political 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.) 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)(1) 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.) 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.
Distributions of capital gains attributable from the sale of certain North
Carolina obligations issued prior to July 1, 1995, may be exempt from taxation
for the Fund's shareholders. Distributions of all net short-term capital gain
and net long-term capital gain earned by the Fund on all 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 authorities, commission,
instrumentalities 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.) 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.
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
JULY 1, 1997
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TABLE OF CONTENTS
How does the Fund Invest its Assets? 2
Investment Restrictions ..... 5
Officers and Trustees ....... 6
Investment Management
and Other Services ......... 9
How does the Fund Buy
Securities for its Portfolio? 10
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?........ 18
Miscellaneous Information ... 22
Financial Statements ........ 24
Useful Terms and Definitions 25
Appendices .................. 25
Description of Ratings ..... 25
State Risk Factors ......... 27
State Tax Treatment......... 30
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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This SAI describes the ten series of Franklin Tax-Free Trust (the "Trust"), an
open-end management investment company, listed below. Each series may
individually or together be referred to as the "Fund(s)."
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
The investment objective of each Fund, except the Puerto Rico and High Yield
Funds, is 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. The Puerto Rico Fund's investment
objective is to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing while seeking
preservation of shareholders' capital. The Puerto Rico Fund also seeks to
provide a maximum level of income that is exempt from the personal income taxes
of the majority of states. The High Yield Fund's investment objective is to
provide investors with a high current yield exempt from federal income taxes. As
a secondary objective, the High Yield Fund seeks capital appreciation to the
extent possible and consistent with its principal investment objective.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCECORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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The Fund, except the High Yield Fund, seeks to achieve its objective by
investing primarily in municipal securities issued by or on behalf of its
respective state or territory, and that state's or territory's local
governments, municipalities, authorities, agencies and political subdivisions.
The High Yield Fund seeks to achieve its objective by investing primarily in a
diversified portfolio of high yield municipal securities from different states.
The Prospectus, dated July 1, 1997, 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?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
All of the Funds, except the Connecticut and Michigan Funds, are diversified
series of the Trust. As a fundamental policy, none of the diversified Funds will
buy a security if, with respect to 75% of its net assets, more than 5% 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, 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, is considered a separate issuer. Escrow-secured or defeased bonds,
described below, are not generally considered an obligation of the original
municipality when determining diversification.
The Connecticut and Michigan Funds are nondiversified series of the Trust and
thus not subject to any restrictions under federal securities laws with respect
to the concentration of their assets in one or relatively few issuers. The
Funds, however, intend to qualify as regulated investment companies under
Subchapter M of the Code. To qualify, at the close of each quarter of the Fund's
taxable year, (i) at least 50% of the value of its total assets must be
represented by cash, government securities, and other securities limited in
respect of any one issuer to not more than 5% of the value of the total assets
of the Fund, and (ii) not more than 25% of the Fund's total assets may be
invested in securities of one issuer, other than U.S. government securities.
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
The Prospectus contains a general description of municipal securities. The
following provides more detailed information about the various municipal and
other securities in which the Fund may invest. There may be other types of
municipal securities that become available that are similar to those described
below and in which the Fund may also invest if consistent with its investment
objective and policies.
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 the
receipt of other kinds of revenue, such as federal revenues available
under the Federal Revenue Sharing Program.
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. This typically represents a short-term
obligation (270 days or less) issued by a municipality to meet working
capital needs.
MUNICIPAL BONDS. These meet longer-term capital needs and generally
have maturities of more than one year when issued. They 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. 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. Revenue bonds are not secured by the full faith, credit and
taxing power of the 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 that may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided 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
facility or other personal property as security for payment.
FLOATING OR VARIABLE RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations with a floating or variable interest rate. They have 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, before specified dates. The payment may be received either from the issuer
or by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the note. The interest rate is adjustable at intervals ranging from
daily up to monthly, and is calculated to maintain the market value of the VRDN
at approximately its par value upon the adjustment date.
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently issued on a
"when-issued" basis. When so issued, 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 assets of the Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income on those assets. It is the Fund's intention, however, to be
fully invested to the extent practicable and consistent with its investment
policies. When the Fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The Fund believes that its
Net Asset Value or income will not be adversely affected by its purchase of
municipal securities on a when-issued basis.
CALLABLE BONDS. Callable bonds allow the issuer to redeem the bonds before their
maturity dates. To protect bondholders, however, callable bonds may be issued
with provisions that prevent them from being called for a period of time,
typically for five to ten years from the date of issue. During times of
generally declining interest rates, if the call-protection on a callable bond
expires, there is an increased likelihood that the bond may be called by the
issuer. The investment manager may sell a callable bond before its call date, if
it believes the bond is at its maximum premium potential.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on the Fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by the investment
manager, the Fund believes it has reduced the risk of an adverse impact on its
Net Asset Value based on calls of callable bonds. In light of the Fund's pricing
policies and because the Fund follows certain amortization procedures required
by the IRS, the Fund is not expected to suffer any material adverse impact
related to the value at which the Fund has carried the bonds in connection with
calls of bonds purchased at a premium. Notwithstanding these policies, however,
the reinvestment of the proceeds of any called bond may be in bonds that pay a
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.
ESCROW-SECURED 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 uses 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 often receive a triple A or
equivalent rating from Moody's, S&P or Fitch.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in
"stripped" form. Stripped municipal securities represent separate
ownership of principal and interest payments on the municipal
securities.
ZERO-COUPON SECURITIES. The Fund may invest in zero-coupon and delayed interest
securities. Zero-coupon securities make no periodic interest payments, but are
sold at a deep discount from their face value. The buyer recognizes a rate of
return determined by the gradual appreciation of the security, which is redeemed
at face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as 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 date approaches. If the issuer defaults, the Fund may not
obtain any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value is generally more volatile than
the value of 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.
The Fund's investment in zero-coupon and delayed interest securities may cause
the Fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. In order to generate cash to
satisfy distribution requirements, the Fund may be required to sell portfolio
securities that it otherwise may have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds 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 when the security is
issued.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). The Board
reviews COPs held in the Fund's portfolio to assure that they are liquid
investments based on various factors reviewed by the investment manager 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 to invest, 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 securities
of comparable credit rating or quality.
U.S. GOVERNMENT OBLIGATIONS. These are issued by the U.S. Treasury or
by agencies and instrumentalities of the U.S. government and are backed
by the full faith and credit of the U.S. government. They include Treasury
bills, notes and bonds.
COMMERCIAL PAPER. This refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
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
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
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 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.
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 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 with respect to the
Connecticut Fund, which will not purchase a security if, as a result: i) more
than 25% of its total assets would be invested in the securities of a single
issuer or ii) with respect to 50% of its total assets, more than 5% of its
assets would be invested in the securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment advisor 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 Templeton 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 the value or liquidity 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 Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund 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
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past FiveYears
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Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 29 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (64)
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, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 55 of the investment companies in the Franklin Templeton Group of
Funds.
David W. Garbellano (82)
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 or trustee, as the case
may be, of 28 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most other subsidiaries of Franklin Resources, Inc. and of 54 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
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.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most other subsidiaries of Franklin Resources, Inc. and of 58 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; FORMERLY Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Harmon E. Burns (52)
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. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc. and Franklin Mutual
Advisers, Inc.; and officer and/or director or trustee, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of 58 of the investment
companies in the Franklin Templeton Group of Funds.
Don Duerson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Vice President, Franklin Advisers, Inc.; and officer of one investment company
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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.; Director and Executive Vice President, Templeton Worldwide,
Inc.; Director, Executive Vice President and Chief Operating Officer, Templeton
Investment Counsel, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief
Financial Officer, Franklin Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice President, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of 58 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 58 of the
investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (34)
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 Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and the investment manager. 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 or
trustees 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>
NUMBER OF
TOTAL FEES BOARDS IN THE
TOTAL FEES RECEIVED FROM THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLINTEMPLETON GROUP OF FUNDS ON
NAME THE TRUST GROUP OF FUNDS** WHICH EACH SERVES**
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III................ $29,900 $165,236 29
Harris J. Ashton.................... $29,900 $343,591 53
S. Joseph Fortunato................. $29,900 $360,411 55
David W. Garbellano................. $28,600 $148,916 28
Frank W.T. LaHaye................... $29,900 $139,233 27
Gordon S. Macklin................... $29,900 $335,541 50
</TABLE>
*For the fiscal year ended February 28, 1997.
**For the calendar year ended December 31, 1996.
***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 59 registered investment companies, with approximately 167 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 or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. 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, 1997, the officers and Board members, as a group, owned of record
and beneficially the following shares of the Fund: approximately 104 shares of
the Connecticut Fund - Class I, 96 shares of the High Yield Fund - Class I,
31,254 shares of the New Jersey Fund - Class I, and 5,642 shares of the Oregon
Fund - Class I, or less than 1% of the total outstanding shares of each Fund's
Class I 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 MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Advisers is the investment manager of
each Fund, except the Connecticut Fund. Investment Advisory is the investment
manager of the Connecticut Fund. The investment manager 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. The investment
manager's extensive research activities include, as appropriate, traveling to
meet with issuers and to review project sites. The investment manager's
activities are subject to the review and supervision of the Board to whom the
investment manager renders periodic reports of the Fund's investment activities.
The investment manager and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
The investment manager and its affiliates act as investment manager to numerous
other investment companies and accounts. The investment manager 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 the investment manager on
behalf of the Fund. Similarly, with respect to the Fund, the investment manager
is not obligated to recommend, buy or sell, or to refrain from recommending,
buying or selling any security that the investment manager 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. The investment manager is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of the investment manager
and other access persons will be made in compliance with the Fund's Code of
Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. The table below shows the management fees paid by the Fund for
the fiscal years ended February 28, 1995, February 29, 1996 and February 28,
1997.
MANAGEMENT FEES PAID
- ------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------
Arizona Fund...........................$ 3,627,683 $ 3,578,992 $ 3,571,548
Colorado Fund.......................... 1,259,548 1,156,138 1,081,347
Connecticut Fund....................... 1,012,114 941,489 892,225
High Yield Fund........................ 19,114,157 16,252,138 14,863,761
Indiana Fund........................... 311,799 298,107 284,741
Michigan Fund.......................... 0* -- --
New Jersey Fund ............... 2,827,318 2,755,151 2,640,430
Oregon Fund ................... 1,964,313 1,887,234 1,831,692
Pennsylvania Fund ............. 3,181,417 3,029,579 2,880,051
Puerto Rico Fund .............. 1,083,818 1,054,668 986,561
*For the period July 1, 1996 through February 28, 1997, management fees, before
any advance waiver, totaled $12,802. Under an agreement by Advisers to waive its
fees, the Fund paid no management fees.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1998. 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 the investment manager on 30 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Under an agreement with the investment manager, FT
Services provides certain administrative services and facilities for the Fund.
These include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services is
a wholly owned subsidiary of Resources.
Under its administration agreement, the investment manager pays FT Services a
monthly administration fee equal to an annual rate of 0.15% of the Fund's
average daily net assets up to $200 million, 0.135% of average daily net assets
over $200 million up to $700 million, 0.10% of average daily net assets over
$700 million up to $1.2 billion, and 0.075% of average daily net assets over
$1.2 billion. The fee is paid by the investment manager. It is not a separate
expense of the Fund.
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.
CUSTODIAN. 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. The custodian does 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 28, 1997, 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 28, 1997.
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 the investment manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits the investment manager to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the investment manager 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, as well as shares of other
funds in the Franklin Templeton Group of Funds, 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 the investment manager 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 the investment manager, 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, 1995, February 29, 1996 and February
28, 1997, the Fund paid no brokerage commissions.
As of February 28, 1997, 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 may 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 to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million. These
breakpoints are reset every 12 months for purposes of additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they 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 before 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 before 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day for Class I shares and on the prior
business day for Class II shares. If the processing dates are different, the
date of the Net Asset Value used to redeem the shares will also be different for
Class I and Class II shares.
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. 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.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
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 the investment
manager. Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. In the absence of a sale or reported bid
and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities, and
various relationships between securities are used to determine the value of
municipal securities.
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 NYSE. 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 NYSE 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 capital loss carryforward or post-October
loss deferral) may generally be made twice each year, once in December and once
following the end of the Fund's fiscal year. These distributions, when made,
will generally be fully taxable to the Fund's shareholders. The Fund may adjust
the timing of these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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
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 12 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. The Fund intends, as a matter of policy, to
declare and pay these dividends, if any, in December to avoid the imposition of
this tax, but can give no assurances that its distributions will be sufficient
to eliminate all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation, gain
or loss will be recognized in an amount equal to the difference between your
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If you hold your shares as a capital asset, gain or loss
realized will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any long-term capital gains distributed to you from your investment in the Fund
and will be disallowed to the extent of exempt-interest dividends paid to you
with respect to such shares.
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 90
days of their purchase (for purposes of determining gain or loss upon the sale
of such shares) if the sale proceeds are reinvested 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
your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a 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 commercial paper do
not generally qualify for tax-free treatment. To the extent that such
investments are made, the Fund will provide you with the percentage of any
dividends paid that 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 on the
application of other state and local laws on distributions and redemption
proceeds received from the Fund. For more information, please see "Appendices -
State Tax Treatment."
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, Distributors acts as principal
underwriter in a continuous public offering for each class 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.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after allowances
to dealers, and the amounts received by Distributors in connection with
redemptions or repurchases of shares for the fiscal years ended February 28,
1995, February 29, 1996 and February 28, 1997.
AMOUNT AMOUNT RECEIVED
TOTAL RETAINED IN CONNECTION
COMMISSIONS BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
- ------------------------------------------------------------------------
1997
Arizona Fund.........................$ 2,438,719 $ 159,341 $ 2,749
Colorado Fund ....................... 838,759 52,237 6,126
Connecticut Fund .................... 958,649 60,427 711
High Yield Fund .................... 26,688,526 1,654,304 52,856
Indiana Fund ........................ 200,618 13,121 0
Michigan Fund ....................... 43,942 2,585 0
New Jersey Fund ..................... 2,075,332 131,524 4,080
Oregon Fund ......................... 1,398,757 89,649 2,950
Pennsylvania Fund ................... 2,594,028 155,077 31,296
Puerto Rico Fund .................... 621,195 39,228 2,964
1996
Arizona Fund ........................$ 2,315,36 $ 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 --
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
The Michigan Fund and Class I and Class II of the remaining Funds have separate
distribution plans or "Rule 12b-1 plans" that were adopted pursuant to Rule
12b-1 of the 1940 Act.
MICHIGAN PLAN. Under the plan, the Michigan Fund may pay up to a maximum of
0.15% per year of its average daily net assets, payable quarterly, for expenses
incurred in the promotion and distribution of its shares, although the Fund is
currently only reimbursing up to 0.10%.
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.
When the Fund reaches $4 billion in assets, the amount to be paid to
Distributors will be reduced from 0.02% to 0.01%. 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.
ALL 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, the
investment manager or Distributors or other parties on behalf of the Fund, the
investment manager 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 under the rules of
the NASD.
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 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 the investment manager 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 28, 1997, Distributors' eligible expenditures
for advertising, printing and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the Fund paid Distributors under the plans
were as follows:
<TABLE>
<CAPTION>
CLASS I CLASS II
--------------------------------------
DISTRIBUTORS' DISTRIBUTORS'
ELIGIBLE AMOUNT PAID ELIGIBLE AMOUNT PAID
EXPENSE BY FUND EXPENSES BY FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona Fund.....................$ 606,066 $ 601,707 $ 43,551 $ 21,812
Colorado Fund.................... 194,411 183,070 51,946 20,656
Connecticut Fund................. 154,631 144,802 38,175 17,705
High Yield Fund.................. 3,935,464 3,414,264 1,624,777 627,923
Indiana Fund..................... 45,186 40,277 -- --
Michigan Fund.................... 2,887 347 -- --
New Jersey Fund.................. 469,131 463,833 107,663 50,155
Oregon Fund...................... 311,070 307,779 58,572 24,625
Pennsylvania Fund................ 538,576 528,116 109,703 42,228
Puerto Rico Fund................. 155,688 153,480 16,638 6,156
</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.
Average annual total return and current yield 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 does not guarantee future results, and 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-, ten-year and from
inception periods 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-,
ten-year and from inception 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.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
average annual total return for each class for the indicated periods ended
February 28, 1997, was as follows:
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- ------------------------------------------------------------------------
Arizona Fund - Class I ......09/01/87 0.98% 6.17% -- % 7.35%
Arizona Fund - Class II .....05/01/95 2.90 -- -- 6.15
Colorado Fund - Class I .....09/01/87 0.92 6.56 -- 7.64
Colorado Fund - Class II ....05/01/95 2.89 -- -- 6.67
Connecticut Fund - Class I...10/03/88 1.01 5.83 -- 6.57
Connecticut Fund - Class II..05/01/95 3.00 -- -- 6.15
High Yield Fund - Class I ...03/18/86 2.34 7.63 8.09 8.15
High Yield Fund - Class II . 05/01/95 4.34 -- -- 7.86
Indiana Fund ................09/01/87 1.43 6.36 -- 7.71
Michigan Fund*...............07/01/96 -- -- -- --
New Jersey Fund - Class I .. 05/12/88 0.64 5.82 -- 7.52
New Jersey Fund - Class II ..05/01/95 2.52 -- -- 6.22
Oregon Fund - Class I .......09/01/87 0.70 5.78 -- 6.97
Oregon Fund - Class II ......05/01/95 2.54 -- -- 6.19
Pennsylvania Fund - Class I .12/01/86 1.08 ` 6.45 6.64 6.71
Pennsylvania Fund - Class II 05/01/95 2.90 -- -- 6.28
Puerto Rico Fund - Class I ..04/03/85 1.56 6.08 6.55 7.57
Puerto Rico Fund - Class II .05/01/95 3.27 -- -- 6.21
*Since the Michigan Fund was in existence for less than one year, as of February
28, 1997, average annual total returns are not provided.
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-, ten-year or from inception periods at the
end of the one-, five-, ten-year or from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return 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. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five-, ten-year or from inception periods. The
cumulative total return for each class for the indicated periods ended February
28, 1997, was as follows:
CUMULATIVE TOTAL RETURN
- ------------------------------------------------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- ------------------------------------------------------------------------
Arizona Fund - Class I...........09/01/87 0.98% 34.89% --% 96.23%
Arizona Fund - Class II..........05/01/95 2.90 -- -- 11.58
Colorado Fund - Class I..........09/01/87 0.92 37.38 -- 101.28
Colorado Fund - Class II.........05/01/95 2.89 -- -- 12.59
Connecticut Fund - Class I.......10/03/88 1.01 32.78 -- 70.86
Connecticut Fund - Class II......05/01/95 3.00 -- -- 11.57
High Yield Fund - Class I........03/18/86 2.34 44.45 117.66 135.99
High Yield Fund - Class II.......05/01/95 4.34 -- -- 14.89
Indiana Fund.....................09/01/87 1.43 36.09 -- 102.49
Michigan Fund....................07/01/96 -- -- -- 1.55
New Jersey Fund - Class I........05/12/88 0.64 32.72 -- 89.36
New Jersey Fund - Class II.......05/01/95 2.52 -- -- 11.72
Oregon Fund - Class I............09/01/87 0.70 32.43 -- 89.71
Oregon Fund - Class II...........05/01/95 2.54 -- -- 11.65
Pennsylvania Fund - Class I......12/01/86 1.08 36.71 90.19 94.57
Pennsylvania Fund - Class II.....05/01/95 2.90 -- -- 11.82
Puerto Rico Fund - Class I.......04/03/85 1.56 34.32 88.67 138.51
Puerto Rico Fund - Class II......05/01/95 3.27 -- -- 11.69
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 February 28, 1997, was as follows:
YIELD
- -----------------------------------------------------------------------
CLASS I CLASS II
- ------------------------------------------------------------------------
Arizona Fund......... 4.55% 4.14%
Colorado Fund ....... 4.62 4.20
Connecticut Fund..... 4.56 4.15
High Yield Fund...... 5.35 4.96
Indiana Fund......... 4.56 --
Michigan Fund ....... 5.25 --
New Jersey Fund...... 4.66 4.23
Oregon Fund.......... 4.57 4.14
Pennsylvania Fund ... 4.77 4.36
Puerto Rico Fund..... 4.68 4.28
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
February 28, 1997, was as follows:
TAXABLE-
EQUIVALENT YIELD
----------------
CLASS I CLASS II
- ------------------------------------------------------------------------
Arizona Fund ........ 7.98% 7.26%
Colorado Fund ....... 8.05 7.32
Connecticut Fund..... 7.91 7.19
High Yield Fund ..... 8.86 8.21
Indiana Fund......... 7.90 --
Michigan Fund ....... 9.09 --
New Jersey Fund...... 8.24 7.48
Oregon Fund.......... 8.32 7.53
Pensylvania Fund .... 8.12 7.43
Puerto Rico Fund..... 7.75 7.09
As of February 28, 1997, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations are based was as follows:
COMBINED RATE*
- ------------------------------------------------------------------------
Arizona Fund.......... 42.98%
Colorado Fund......... 42.62
Connecticut Fund...... 42.32
High Yield Fund....... 39.60
Indiana Fund.......... 42.26
Michigan Fund......... 42.26
New Jersey Fund....... 43.45
Oregon Fund........... 45.04
Pennsylvania Fund..... 41.29
Puerto Rico Fund...... 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 and state 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.
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
28, 1997, was as follows:
CURRENT
DISTRIBUTION RATE
- ------------------------------------------------------------------------
CLASS I CLASS II
- ------------------------------------------------------------------------
Arizona Fund......... 5.31% 5.04%
Colorado Fund ....... 5.36 4.96
Connecticut Fund..... 5.47 5.05
High Yield Fund ..... 6.26 5.83
Indiana Fund......... 5.37 --
Michigan Fund ....... 5.29 --
New Jersey Fund...... 5.34 4.91
Oregon Fund.......... 5.17 4.70
Pennsylvania Fund ... 5.53 5.11
Puerto Rico Fund..... 5.39 4.98
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 and
state tax rates available to the Fund. The taxable-equivalent distribution rate
for each class for the 30-day period ended February 28, 1997, was as follows:
TAXABLE-EQUIVALENT
DISTRIBUTION RATE
- ------------------------------------------------------------------------
CLASS I CLASS II
- ------------------------------------------------------------------------
Arizona Fund......... 9.31% 8.84%
Colorado Fund ....... 9.34 8.64
Connecticut Fund..... 9.48 8.75
High Yield Fund...... 10.36 9.65
Indiana Fund......... 9.30- --
Michigan Fund ....... 9.17 --
New Jersey Fund...... 9.44 8.68
Oregon Fund ......... 9.41 8.55
Pennsylvania Fund.... 9.42 8.70
Puerto Rico Fund..... 8.92 8.25
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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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) 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, and 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) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
j) 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.
k) Savings and Loan Historical Interest Rates -
as published in the U.S. Savings & Loan League Fact Book.
l) 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.
m) 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.
n) 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 sales material issued by the Fund may also 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.
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
- -------------------------
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.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. 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 49 years and
now services more than 2.7 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $191 billion in
assets under management for more than 5.2 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 122
U.S. based open-end investment companies 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
$44 billion in municipal bond assets for over three quarters of a million
investors. Franklin's municipal research department is one of the largest in the
industry. 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.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1997, 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 1997.)
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
the Fund.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers 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 Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin
number one in service quality for five of the past nine years.
Franklin had the first single-state municipal bond fund in Michigan.
According to Strategic Insight, dated February 28, 1997, the Oregon and Arizona
Funds were the largest municipal bond funds in their respective states.
As of June 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------
MICHIGAN FUND - CLASS I
Franklin Resources, Inc..........................226,975 046.39%
1850 Gateway Dr., 6th Floor
San Mateo, CA 94404-2467
David W. Elliott TTEE.............................49,067.713 8.4%
David W. Elliott Rev Tr
1291 Sunniwood Pl.
Rochester, MI 48306
COLORADO FUND - CLASS II
Suzanne L. Strickland.............................38,414.814 6.7%
1070 Darwin Ct.
Denver, CO 80221
OREGON FUND - CLASS II
Dale Burgess TTEE.................................48,329.139 6.3%
Dale Burgess LIV TR
82613 Meadow Lane
Creswell, OR 97426-9402
PUERTO RICO FUND - CLASS II
PaineWebber for the benefit of
Morris Kaplan & Mary C. Kaplan JTWROS ............14,971.000 8.8%
204 Holland Street
Cranston, RI 02920-2427
Philip W. Chao.................................... 8,605.244 5.1%
1100 Lovering Ave., #1406
Wilmington, DE 19806
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.
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, before 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.
Summary of Code of Ethics. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 28, 1997, 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 investment manager of each Fund, except
the Connecticut Fund
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Each Fund, except the Indiana and Michigan Funds, 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. Shares of the Indiana and
Michigan Funds 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
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds except
Franklin Valuemark Funds, Franklin Government Securities Trust,
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the
Connecticut Fund's investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
NYSE - New York Stock Exchange
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, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
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 other wholly owned
subsidiaries 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 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 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.
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 therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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 signs
are not used with the AAA, 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'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, CDs, 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 an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-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.
STATE RISK FACTORS
The following information is provided in light of the Fund's policy of investing
primarily in municipal securities issued by or on behalf of its respective state
or territory, and that state's or territory's local governments, municipalities,
authorities, agencies and political subdivisions. It is not a complete analysis
of every material fact that may affect the ability of issuers of municipal
securities in the Fund's respective state or territory to meet their debt
obligations or the economic or political conditions within the state or
territory. It is based on information available to the Fund as of the date of
this SAI and on historically reliable sources, including periodic publications
by national rating services, but it has not been independently verified by the
Fund.
ARIZONA
Arizona has relied principally on lease obligations, revenue bonds, and
pay-as-you-go financing for its capital needs. A significant portion of the
state's debt is supported by motor fuel taxes and highway user fees.
During the 1980s, Arizona's per capita expenditures, which had been below the
national average, climbed to 105% of the U.S. average. At the same time, the
state implemented various tax cuts. Together, these two factors drained the
state's cash reserves, and its general fund balance fell from 21% of
expenditures to 0%. 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 internal borrowings. Recently,
strong economic growth has enabled the state to replenish its general fund,
which had a balance of 6.9% of expenditures by the end of fiscal 1995. The
state's budget stabilization fund is also fully funded, as of July 1996, which
may help provide protection in an economic downturn.
Arizona's economy has diversified in recent years and has continued its shift
away from agriculture and mining and towards manufacturing and services. The
move away from farming, which consumes about 80% of the water used in the state,
may increase the water available for municipal uses. Manufacturing recently
accounted for approximately 9.2% of the state's total employment, trade 22.7%,
services 30.2%, government 14.0%, construction 5.8%, and finance-insurance-real
estate 8.6%. While the state experienced some job losses during the national
recession in the early 1990s, its economy fared better than the nation as a
whole, and it has since recovered its losses.
COLORADO
Colorado's economic base has become more aligned with the overall U.S. economy
and has diversified among services (29.3%), trade (24.8%), government (16.6%),
and manufacturing (10.5%). While the manufacturing sector lost jobs in 1995, the
relocation of Lockheed Martin's rocket manufacturing plant from San Diego to
Colorado, along with increased activity in the telecommunications and high
technology industries, have allowed employment in the manufacturing sector to
remain above prerecession levels. Retail trade has also been slowing, but is
expected to remain strong with estimated growth of 6.7% in 1997.
Since Colorado's constitution prohibits the issuance of general obligation debt,
the state's debt burden has been low. The state has relied on appropriations
from its general fund for capital projects, as well as on long-term lease
purchase obligations. The fiscal 1997 budget includes transfers from the general
fund of $115 million for highways and $116 million to additional capital funds.
After these transfers, the general fund balance is expected to decline to $280
million by the end of the fiscal year, compared to the ending fiscal 1996
balance of $315 million. Other expenditures in the fiscal 1997 budget include
increases based on inflation for k-12 education and moderate increases for
health, welfare and corrections.
CONNECTICUT
In the late 1980's and early 1990's, Connecticut's economy weakened, producing
revenue shortfalls and over-budget social services spending. In 1991, the state
incurred a general fund deficit of more than $800 million. As a result, the
state issued approximately $966 million in economic recovery notes to finance
its accumulated deficit of more than $1 billion and implemented various
financial reforms, including a 4% personal income tax. Since that time, the
state has generated operating surpluses in fiscal years 1992-1996. Despite
original estimates of a $22 million shortfall, the state ended fiscal 1996 with
an estimated $250 million surplus. An unexpected increase in income tax revenues
of $182 million contributed to the positive results. The state plans to reserve
part of this surplus for payment of principal and interest on its economic
recovery notes in 1997.
Debt indicators have more than doubled in Connecticut over the last decade,
which may affect the state's fiscal flexibility. While the state has shown signs
of strength over the last year, the implementation of planned tax cuts, along
with projections of slow economic growth through the year 2000, may create
challenges for the state as it attempts to maintain balanced operations.
INDIANA
Indiana's financial position declined significantly during the early 1980s. In
1982, the state legislature established an economic stabilization or "rainy day"
reserve fund. This fund was intended to reduce the potential negative impact on
the state's revenues of a future economic recession. Since the early 1980s,
steady economic and revenue growth has led to a substantially improved financial
position, one that recently was considered among the nation's strongest.
The recent strength of Indiana's economy and aggressive spending cuts have
resulted in three consecutive years of operating surpluses. As of June 30, 1996,
the state's combined general, property tax replacement, and tuition reserve
funds had a balance of $1.24 billion, while the balance of the rainy day fund
was $439.5 million. Together, the state's total reserves of $1.68 billion at the
end of fiscal 1996 were 23% of the state's operating expenditures, and compared
favorably to the balance of $490.3 million at the end of fiscal 1993. For fiscal
1997, the reserve balance is expected to decrease slightly to $1.63 billion.
While the state's economy and financial performance have been strong, the
unfunded liability of the State Teachers Retirement Fund has continued to grow.
Recently, this liability was as high as $6.1 billion. Indiana has taken several
steps to attempt 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, which also shifts primary funding responsibility from the state to the
local school districts, and (ii) creating a special pension stabilization fund
to pay teachers' pensions when the growth in pension payouts in a year exceeds
the state's revenue growth.
MICHIGAN
Since the early 1990s when the state's financial position was weakened by the
national recession and imbalances in the budget, Michigan's economy has
sustained steady growth. Despite an increase in the size of its labor force,
Michigan's unemployment level is at its lowest level since the 1960s and is
below the national average. Per capita personal income levels are also better
than the national level for the first time since 1986.
Michigan's fiscal position has also improved. The state's budget stabilization
fund was estimated to be more than $1 billion at September 30, 1996, the highest
level in the state's history. Michigan may need the increased stability these
reserve levels provide in order to offset higher school funding requirements. In
1993, property tax reforms eliminated all school operating property taxes. To
maintain school operating budgets, voters approved a school funding initiative
in 1994 aimed at providing replacement funding. As a result, the state is now
responsible for funding a considerably larger portion of local school district
operations. In fiscal 1994, the state's expenditures from the school aid fund
were $4.2 billion. By fiscal 1996, these expenditures were estimated at more
than $8 billion. School funding reform, coupled with the state's increasing
unfunded pension liabilities, may present potential areas of financial stress
that will need to be addressed in the near future.
NEW JERSEY
New Jersey's credit strength has been based on its broad-based economy, high
wealth levels, and history of maintaining a positive financial position in an
environment of slow economic growth. During the recent recession, however, New
Jersey had problems maintaining balanced operations. To address these problems,
the state began reducing expenditures by limiting the amount of resources
available to fund them. For example, for fiscal years 1995-1997, average growth
in budgeted expenditures was limited to 1%, while tax cuts were phased in over a
three-year period.
The state's efforts to correct budgetary problems have produced positive results
in recent years. Fiscal 1996 results indicate a general fund balance of more
than $870 million and the fiscal 1997 budget is currently balanced, with an
estimated ending general fund balance of $550 million. The 1997 budget relies
less on nonrecurring resources than in prior years and includes a decrease in
appropriations from fiscal 1996 of 1.3%. Most of the spending cuts during 1997
will come from human services, reflecting reforms to welfare and Medicaid
systems and an expected decline in the number of caseloads. Capital construction
and public education are essentially the only areas scheduled to receive
increased funding.
New Jersey's debt ratios have remained moderately high. Debt service costs are
expected to continue to increase in the coming years, as recently issued bonds
come due. New Jersey will also need to address increased funding requirements
for public schools, resulting from a recent state supreme court decision that
found the state's existing school finance system is unconstitutional. High debt
service costs and increased funding requirements for public schools may present
challenges for the state in future years.
OREGON
In November 1990, voters approved Measure 5, which limited local property taxes
and required the state to provide replacement revenues to schools. The
replacement requirement was $492 million in the 1991-1993 biennium and rose to
$2.7 billion for the fiscal 1995-1997 biennium. Nonetheless, the state has been
able to meet this obligation and balance its budget without implementing a large
new revenue source, primarily due to rapid growth in revenues resulting from the
state's growing economy and strong fiscal oversight.
On November 5, 1996, voters passed another initiative, Ballot Measure 47. When
fully implemented, this measure could negatively impact many municipal entities
in Oregon. In effect, Measure 47 cuts property taxes and limits future
increases, thereby reducing the financial flexibility of local governments and
creating potential budgetary pressures. Estimates indicate that Measure 47 will
reduce revenues for schools, already hit hard by Measure 5, and general
governments by 20%, or $1 billion over the next two years. Although this measure
does not directly affect the state, Oregon may face significant political
pressure to provide assistance to local governments, especially through further
increases in school funding.
While the state estimates that it will end fiscal 1997 with a budget balance of
more than $400 million, new capital programs, especially for correction
facilities, and the uncertain effects on the state and local governments of
Measure 47, may create future challenges as the state attempts to maintain
positive financial performance. The increased use of ballot initiatives, in many
cases to reduce taxes and thus limit financial flexibility, may also create
greater uncertainty in Oregon's municipal securities market. This increased
uncertainty may lead to a demand by investors for higher yields on obligations
issued within the state, and thus an increase in borrowing costs for issuers.
PENNSYLVANIA
In the early 1990s, Pennsylvania faced a general fund accumulated deficit of $1
billion, reflecting revenue shortfalls caused in part by the recession and
increased spending for Medicaid, social services and corrections. With the help
of significant tax increases and various spending control measures, the state
has been able to eliminate this deficit. Its general fund reserve levels,
however, have remained fairly small.
During fiscal 1996, the state reversed some of the tax increases implemented in
the early 1990s, primarily because of the success of spending control efforts in
the areas of Medicaid and welfare. During the year, however, the state's
unreserved general fund balance declined from $443 million to $382 million. The
fiscal 1997 budget includes expenditure increases of 0.6% and a further
reduction of the general fund balance to $178 million. The proposed 1998 budget
also includes spending increases of approximately 2.7% over 1997 levels, mostly
in the areas of education, public welfare and corrections, and currently assumes
the depletion of the entire general fund balance.
PUERTO RICO
Puerto Rico's debt level has been high, reflecting the pressures of its
considerable capital needs for continued development and infrastructure
improvements. Recently, debt service represented about 10% of Puerto Rico's
revenues. Puerto Rico has also had a large unfunded pension liability, at times
exceeding $5 billion.
Despite its high levels of debt, Puerto Rico's overall financial performance has
been improving. At the end of fiscal 1995, Puerto Rico's audited general fund
unreserved balance was $443 million, up from a negative $195 million at the end
of fiscal 1993. Fiscal 1996 results are also expected to be positive, due in
part to tax revenue increases. The current fiscal 1997 budget is balanced, with
revenues expected to increase 4.8% from 1996. Expenditure increases in the 1997
budget are mainly in the areas of education (up 2.8%) and public safety (up
11%).
Over the past three years, positive financial performance has allowed Puerto
Rico to add to its rainy day and emergency reserves and maintain some fiscal
flexibility. At the beginning of fiscal 1997, these reserves totaled a combined
$135 million, compared with a balance of $50 million three years ago. While a
large portion of these reserves have been appropriated in the current fiscal
year to repair damage caused by Hurricane Hortense, Puerto Rico expects to
replenish its reserves by the start of fiscal 1998.
Although Puerto Rico's outlook is considered stable, Puerto Rico will face
challenges over the coming years. Puerto Rico must find other ways to attract
and maintain businesses after the loss of tax incentives currently provided
under Section 936. Puerto Rico also has to find ways to pay for the
privatization of its health care system, which is expected to cost more than
$700 million per year when it is fully implemented in 1999. Currently, Puerto
Rico is hoping to pay for its health care reform from savings created by the
privatization of its existing public hospitals, which often operate at a loss.
STATE TAX TREATMENT
The following information on the income tax treatment of dividends from the Fund
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.
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.) 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 in
published guidance 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 Colorado Department of
Revenue has confirmed in guidance dated September 1993 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.) 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 authorities,
districts, or similar public entities 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, that are derived from such exempt obligations will be exempt from state
personal income tax, subject to the limitation below for direct federal
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.) or obligations of other states and
their political subdivisions do not qualify for this exemption.
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 overlapping 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.) 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.) 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 Michigan
tax return instructions, 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. In 1995,
legislation was passed repealing this intangible personal property tax effective
January 1, 1998.
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). The 80 percent investment threshold
requirement in exempt obligations has been recently ruled invalid in the New
Jersey tax court case, Colonial Trust III and Investment Company Institute v.
Director, Division of Taxation, which was decided on February 21, 1997.
Dividends paid from interest earned on indirect U.S. government obligations
(GNMAs, FNMAs, etc.) 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 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.) 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 that 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.) 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.
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.
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.
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 that impose an income tax, pursuant to section 103
of the Code and 31 U.S.C. 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 received by the Fund dated May 24, 1996.
FRANKLIN FEDERAL
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
FRANKLIN TAX-FREE TRUST
STATEMENT OF
ADDITIONAL INFORMATION
JULY 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
MATEO, CA 94403-7777 1-800/DIAL BEN
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TABLE OF CONTENTS
How does the Fund Invest its Assets? 2
Investment Restrictions .......... 4
Officers and Trustees ............ 5
Investment Management
and Other Services .............. 8
How does the Fund Buy
Securities for its Portfolio? ... 9
How Do I Buy, Sell and
Exchange Shares? ................ 10
How are Fund Shares Valued? ...... 12
Additional Information on
Distributions and Taxes ......... 13
The Fund's Underwriter ........... 14
How does the Fund
Measure Performance? ............ 15
Miscellaneous Information ........ 18
Financial Statements ............. 19
Useful Terms and Definitions ..... 19
Appendix
Description of Ratings .......... 20
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The Franklin Federal Intermediate-Term Tax-Free Income Fund (the "Fund") is a
non-diversified series of Franklin Tax-Free Trust (the "Trust"), an open-end
management investment company. The Fund's investment objective is to provide
investors with as high a level of income exempt from federal income taxes,
including the individual alternative minimum tax, as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The Fund seeks
to achieve its objective by investing primarily in investment grade securities
and maintaining a dollar-weighted average portfolio maturity of three to ten
years.
The Prospectus, dated July 1, 1997, 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.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
The Prospectus contains a general description of municipal securities. The
following provides more detailed information about the various municipal and
other securities in which the Fund may invest. There may be other types of
municipal securities that become available that are similar to those described
below and in which the Fund may also invest, if consistent with its investment
objective and policies.
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 the receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program.
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. This typically represents a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS. These meet longer-term capital needs and generally have
maturities of more than one year when issued. They 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. 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. Revenue bonds are not secured by the full faith, credit and
taxing power of the 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 that may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided 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
facility or other property as security for payment.
FLOATING OR VARIABLE RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations with a floating or variable interest rate. They have 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, before specified dates. The payment may be received either from the issuer
or by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the note. The interest rate is adjustable at intervals ranging from
daily up to monthly, and is calculated to maintain the market value of the VRDN
at approximately its par value upon the adjustment date.
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently issued on a
"when-issued" basis. When so issued, 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 assets of the Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income on those assets. It is the Fund's intention, however, to be
fully invested to the extent practicable and consistent with its investment
policies. When the Fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The Fund believes that its
Net Asset Value or income will not be adversely affected by its purchase of
municipal securities on a when-issued basis.
CALLABLE BONDS. Callable bonds allow the issuer to redeem the bonds before their
maturity dates. To protect bondholders, however, callable bonds may be issued
with provisions that prevent them from being called for a period of time,
typically five to ten years from the date of issue. During times of generally
declining interest rates, if the call-protection on a callable bond expires,
there is an increased likelihood that the bond may be called by the issuer.
Advisers may sell a callable bond before its call date, if it believes the bond
is at its maximum premium potential.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on the Fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by Advisers, the Fund
believes it has reduced the risk of an adverse impact on its Net Asset Value
based on calls of callable bonds. In light of the Fund's pricing policies and
because the Fund follows certain amortization procedures required by the IRS,
the Fund is not expected to suffer any material adverse impact related to the
value at which the Fund has carried the bonds in connection with calls of bonds
purchased at a premium. Notwithstanding these policies, however, the
reinvestment of the proceeds of any called bond may be in bonds that pay a 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.
ESCROW-SECURED 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 uses 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 often receive a triple A or
equivalent rating from Moody's, S&P or Fitch.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on the municipal securities.
ZERO-COUPON SECURITIES. The Fund may invest in zero-coupon and delayed interest
securities. Zero-coupon securities make no periodic interest payments, but are
sold at a deep discount from their face value. The buyer recognizes a rate of
return determined by the gradual appreciation of the security, which is redeemed
at face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as 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 date approaches. If the issuer defaults, the Fund may not
obtain any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value is generally more volatile than
the value of 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.
The Fund's investment in zero-coupon and delayed interest securities may cause
the Fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. In order to generate cash to
satisfy distribution requirements, the Fund may be required to sell portfolio
securities that it otherwise may have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds 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 when the security is
issued.
CERTIFICATES OF PARTICIPATION. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). The Board
reviews COPs held in the Fund's portfolio to assure that they are 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 to invest, 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 securities of comparable
credit rating or quality.
U.S. GOVERNMENT OBLIGATIONS. These are issued by the U.S. Treasury or by
agencies and instrumentalities of the U.S. government and are backed by the full
faith and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER. This refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
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
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
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 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.
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 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 advisor 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 Advisers 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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity 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 Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund 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
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION DURING
NAME, AGE AND ADDRESS WITH THE TRUST PAST FIVE YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 29 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (64)
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, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 55 of the investment companies in the Franklin Templeton Group of
Funds.
David W. Garbellano (82)
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 or trustee, as the case
may be, of 28 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chariman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most other subsidiaries of Franklin Resources, Inc. and of 54 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
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.;
Senior Vice President and Director, Franklin Advisory Services, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin Resources,
Inc. and of 58 of the investment companies in the Franklin Templeton Group of
Funds.
Frank W.T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President, National Association
of Securities Dealers, Inc.
Harmon E. Burns (52)
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. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc. and Franklin Mutual
Advisers, Inc.; and officer and/or director or trustee, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of 58 of the investment
companies in the Franklin Templeton Group of Funds.
Don Duerson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Trustee
Vice President of Franklin Advisers, Inc.; and officer of one investment company
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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 and Director, Templeton Worldwide,
Inc.; Director, Executive Vice President and Chief Operating Officer, Templeton
Investment Counsel, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief
Financial Officer, Franklin Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice President, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of 58 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 58 of the
investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (34)
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 Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton 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 or trustees 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 NUMBER OF
RECEIVED FROM BOARDS IN THE
TOTAL FEES THE FRANKLIN FRANKLIN TEMPLETON
RECEIVED FROM TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
- --------------------------------------------------------------------------------
Frank H. Abbott $29,900 $165,236 29
Harris J. Ashton $29,900 $343,591 53
S. Joseph Fortunato $29,900 $360,411 55
David W. Garbellano $28,600 $148,916 28
Frank W.T. LaHaye $29,900 $139,233 27
Gordon S. Macklin $29,900 $335,541 50
*For the fiscal year ended February 28, 1997.
**For the calendar year ended December 31, 1996.
***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 59 registered investment companies, with approximately 167 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 or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. 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, 1997, the officers and Board members, did not own of record or
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT 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 and its officers,
directors and employees are covered by fidelity insurance for the protection of
the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. 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. 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. Please
see "Miscellaneous Information - Summary of 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% of the value of its net
assets up to and including $100 million; and 1/24 of 1% of the value of its net
assets over $100 million up to and including $250 million; and 9/240 of 1% of
the value of its net assets in excess of $250 million. The fee is computed at
the close of business on the last business day of each month.
For the fiscal years ended February 28, 1995, February 29, 1996 and February 28,
1997, management fees, before any advance waiver, totaled $455,865, $491,681 and
$586,462, respectively. Under an agreement by Advisers to limit its fees, the
Fund paid management fees totaling $250,402, $335,817 and $438,843,
respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1998. 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.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
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.
CUSTODIAN. 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. The custodian does 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 28, 1997, 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 28, 1997.
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 Advisers receives 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 staffs 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, as well as shares of other funds in the Franklin Templeton Group of
Funds, 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, 1995, February 29, 1996 and February
28, 1997, the Fund paid no brokerage commissions.
As of February 28, 1997, 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 may 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 to $2 million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales over $50
million to $100 million, plus 0.15% on sales over $100 million. These
breakpoints are reset every 12 months for purposes of additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they 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 before 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 before 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day.
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. 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.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE 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. In the absence of a sale or reported bid and ask
prices, information with respect to bond and note transactions, quotations from
bond dealers, market transactions in comparable securities, and various
relationships between securities are used to determine the value of municipal
securities.
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 NYSE. 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 NYSE 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 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 capital loss carryforward or post-October
loss deferral) may generally be made twice each year, once in December and once
following the end of the Fund's fiscal year. These distributions, when made,
will generally be fully taxable to the Fund's shareholders. The Fund may adjust
the timing of these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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
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 12 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. The Fund intends, as a matter of policy, to
declare and pay these dividends, if any, in December to avoid the imposition of
this tax, but can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation, gain
or loss will be recognized in an amount equal to the difference between your
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If you hold your shares as a capital asset, gain or loss
realized will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any long-term capital gains distributed to you from your investment in the Fund
and will be disallowed to the extent of exempt-interest dividends paid to you
with respect to such shares.
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 the sales proceeds are reinvested 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.
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 the fund. Investments in GNMA/FNMA securities and commercial paper do
not generally qualify for tax-free treatment. To the extent that such
investments are made, the Fund will provide you with the percentage of any
dividends paid that 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 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 with your tax
advisor before buying shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, 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, 1995, February 29, 1996 and
February 28, 1997, were $316,890, $235,212 and $301,298, respectively. After
allowances to dealers, Distributors retained $41,373, $33,015 and $40,297 in net
underwriting discounts and commissions, for the respective years, and received
$3,334 and $0 in connection with redemptions or repurchases of shares for the
fiscal years ended February 29, 1996 and February 28, 1997, respectively.
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 under the rules of the NASD.
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 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 28, 1997, Distributors had eligible
expenditures of $207,413 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the plan, of which the Fund paid Distributors
$85,976.
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.
Average annual total return and current yield 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 does not guarantee future results, and 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-year and from inception
periods 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-year and from
inception 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 February
28, 1997, and for the period from inception (September 23, 1992) to February 28,
1997, was 2.78% and 6.49%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
Effective Yield = [(Base Period Return + 1) /7] - 1
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-year and from inception periods at the end of the one-year
and from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return 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. Cumulative total return, however, will be based
on the Fund's actual return for a specified period rather than on its average
return over one-year and from inception periods. The Fund's cumulative total
return for the one-year period ended on February 28, 1997, and for the period
from inception (September 23, 1992) to February 28, 1997, was 2.78% and 32.17%,
respectively.
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 February 28, 1997, was 4.69%.
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 February 28, 1997, was
7.76%.
As of February 28, 1997, 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 Fund's current
distribution rate for the 30-day period ended February 28, 1997, 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 Fund's taxable-equivalent distribution rate for
the 30-day period ended February 28, 1997, 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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising 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
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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, and 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) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
j) 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 sales material issued by the Fund may also 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.
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.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. 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 49 years and
now services more than 2.7 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $191 billion in
assets under management for more than 5.2 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 122
U.S. based open-end investment companies 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
$44 billion in municipal bond assets for over three quarters of a million
investors. Franklin's municipal research department is one of the largest in the
industry. 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 nine years.
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.
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, before 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.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 28, 1997, 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 - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different 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
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
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.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 2.25%.
PROSPECTUS - The prospectus for the Fund dated July 1, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
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.
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 other wholly owned
subsidiaries of Resources.
APPENDIX
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 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 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: 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.
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 therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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 signs
are not used with the AAA category.
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
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, CDs, 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 an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-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 28, 1997 as
filed electronically with the Securities and Exchange Commission on Form
Type N-30D on May 9, 1997.
(i) Report of Independent Accountants
(ii) Statements of Investments in Securities and Net Assets
- February 28, 1997.
(iii) Statements of Assets and Liabilities - February 28, 1997.
(iv) Statement of Operations - for the year ended February 28,
1997.
(v) Statements of Changes in Net Assets - for the years ended February
28, 1997, and February 29, 1996.
(vi) Notes to Financial Statements
(b) Exhibits:
The following exhibits are incorporated by reference as noted, except
Exhibits 5 (i), 11(i), 15(i), and 27(1 through 50) which are attached.
(1) copies of the charter as now in effect;
(i) Restated Agreement and Declaration of Trust dated October
26, 1984
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated July 16, 1991
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust dated April 21, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of Agreement and Declaration of
Trust dated December 14, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to By-Laws dated December 8, 1987
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii) Amendments to By-Laws dated April 21, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of By-Laws dated December 14, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Certificate of Secretary dated February 28, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the holders
of such securities, and copies of each security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Investment Advisory Services, Inc. on behalf of Franklin
Connecticut Tax-Free Income Fund dated October 1, 1996
(ii) 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
(iii) 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
Statement 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 trustees 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) 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
(ii) 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
(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 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 fund:
Dated June 1, 1996
Franklin Michigan Tax-Free Income Fund
(ii) 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 1, 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
(iii) 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
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(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 Michigan Tax-Free Income
Fund
20. Financial Data Schedule for Franklin Georgia Tax-Free Income
Fund Class I
21. Financial Data Schedule for Franklin Georgia Tax-Free Income
Fund Class II
22. Financial Data Schedule for Franklin Missouri Tax-Free Income
Fund Class I
23. Financial Data Schedule for Franklin Missouri Tax-Free Income
Fund Class II
24. Financial Data Schedule for Franklin Oregon Tax-Free Income
Fund Class I
25. Financial Data Schedule for Franklin Oregon Tax-Free Income
Fund Class II
26. Financial Data Schedule for Franklin Texas Tax-Free Income
Fund Class I
27. Financial Data Schedule for Franklin Texas Tax-Free Income
Fund Class II
28. Financial Data Schedule for Franklin Virginia Tax-Free Income
Fund Class I
29. Financial Data Schedule for Franklin Virginia Tax-Free Income
Fund Class II
30. Financial Data Schedule for Franklin Alabama Tax-Free Income
Fund Class I
31. Financial Data Schedule for Franklin Alabama Tax-Free Income
Fund Class II
32. Financial Data Schedule for Franklin Florida Tax-Free Income
Fund Class I
33. Financial Data Schedule for Franklin Florida Tax-Free Income
Fund Class II
34. Financial Data Schedule for Franklin Indiana Tax-Free Income
Fund
35. Financial Data Schedule for Franklin Louisiana Tax-Free Income
Fund Class I
36. Financial Data Schedule for Franklin Louisiana Tax-Free Income
Fund Class II
37. Financial Data Schedule for Franklin North Carolina Tax-Free
Income Fund Class I
38. Financial Data Schedule for Franklin North Carolina Tax-Free
Income Fund Class II
39. Financial Data Schedule for Franklin Arizona Tax-Free Income
Fund Class I
40. Financial Data Schedule for Franklin Arizona Tax-Free Income
Fund Class II
41. Financial Data Schedule for Franklin New Jersey Tax-Fee Income
Fund Class I
42. Financial Data Schedule for Franklin New Jersey Tax-Free
Income Fund Class II
43. Financial Data Schedule for Franklin Connecticut Tax-Free
Income Fund Class I
44. Financial Data Schedule for Franklin Connecticut Tax-Free
Income Fund Class II
45. Financial Data Schedule for Franklin Maryland Tax-Free Income
Fund Class I
46. Financial Data Schedule for Franklin Maryland Tax-Free Income
Fund Class II
47. Financial Data Schedule for Franklin Kentucky Tax-Free Income
Fund
48. Financial Data Schedule for Franklin Federal Intermediate-Term
Tax-Free Income Fund
49. Financial Data Schedule for Franklin Arizona Insured Tax-Free
Income Fund
50. 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 March 31, 1997 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 3,624 134
Arizona Insured Fund 806 N/A
Arizona Fund 13,612 204
Colorado Fund 5,584 174
Connecticut Fund 4,112 143
Federal Intermediate-Term
Fund 2,474 N/A
Florida Insured Fund 1,463 806
Florida Fund 23,475 615
Georgia Fund 3,545 159
High Yield Fund 100,578 6,241
Indiana Fund 1,747 N/A
Insured Fund 33,620 603
Kentucky Fund 1,037 N/A
Louisiana Fund 2,509 92
Maryland Fund 5,055 210
Massachusetts Insured Fund 6,608 213
Michigan Insured Fund 27,880 659
Michigan Fund 118 N/A
Minnesota Insured Fund 12,413 167
Missouri Fund 7,077 183
New Jersey Fund 15,342 531
North Carolina Fund 6,028 340
Ohio Insured Fund 17,084 465
Oregon Fund 8,718 264
Pennsylvania Fund 18,083 544
Puerto Rico Fund 6,215 102
Texas Fund 2,784 49
Virginia Fund 6,855 245
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 trustees of the Registrant's manager also serve as officers
and/or trustees for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group of
Funds. For additional information please see Part B and Schedules A and D of
Form ADV of the Funds' Investment Managers, Franklin Advisers, Inc. (SEC File
801-26292) and Franklin Investment Advisory Services, Inc.(SEC File 801-52152),
incorporated herein by reference, which sets forth the officers and trustees of
the investment managers and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and trustees
during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
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 High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
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
Fund Allocator Series
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 Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, 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.
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
27th day of June, 1997.
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
- ------------------------------------------------------------
/s/Rupert H. Johnson, Jr. Executive Officer
Dated: June 27, 1997
MARTIN L. FLANAGAN* Principal Financial Officer
- -----------------------------------------------------------------
Martin L. Flanagan Dated: June 27, 1997
DIOMEDES LOO-TAM* Principal Accounting Officer
- ------------------------------------------------------------------
Diomedes Loo-Tam Dated: June 27, 1997
FRANK H. ABBOTT, III* Trustee
- -------------------------------------------------------------------
Frank H. Abbott, III Dated: June 27, 1997
HARRIS J. ASHTON* Trustee
- -------------------------------------------------------------------
Harris J. Ashton Dated: June 27, 1997
S. JOSEPH FORTUNATO* Trustee
- -------------------------------------------------------------------
S. Joseph Fortunato Dated: June 27, 1997
DAVID W. GARBELLANO* Trustee
- -------------------------------------------------------------------
David W. Garbellano Dated: June 27, 1997
CHARLES B. JOHNSON* Trustee
- ------------------------------------------------------------------
Charles B. Johnson Dated: June 27, 1997
FRANK W. T. LAHAYE* Trustee
- ------------------------------------------------------------------
Frank W. T. LaHaye Dated: June 27, 1997
GORDON S. MACKLIN* Trustee
- -----------------------------------------------------------------
Gordon S. Macklin Dated: June 27, 1997
*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 *
dated December 14, 1993
EX-99.B1(v) Certificate of Amendment of *
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 Attached
Registrant and Franklin
Adviser's, Inc. on behalf of
Franklin Connecticut Tax-Free
Income Fund dated October 1,
1996
EX-99.B5(ii) Management Agreement between *
Registrant and Franklin
Advisers, Inc. dated December
1, 1986
EX-99.B5(iii) 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) Master Custodian Agreement *
between Registrant and Bank of
New York dated February 16, 1996
EX-99.B8(ii) 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
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) Distribution Plan pursuant to Attached
Attached Rule 12b-1 on behalf of
Franklin Micigan Tax-Free
Income Fund dated June 1, 1996
EX-99.B15(ii) Class I Shares Distribution *
Plans pursuant to Rule 12b-1
dated July 1, 1993, and May 4,
1994
EX-99.B15(iii) 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 quotations
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 *
EX-27.B-1 Financial Data Schedule for Attached
Franklin Insured Tax-Free
Income Fund Class I
EX-27.B-2 Financial Data Schedule for Attached
Franklin 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 Attached
Franklin Michigan Insured
Tax-Free Income Fund Class I
EX-27.B-6 Financial Data Schedule for Attached
Franklin Michigan Insured
Tax-Free Income Fund Class II
EX-27.B-7 Financial Data Schedule for Attached
Franklin Minnesota Insured
Tax-Free Income Fund Class I
EX-27.B-8 Financial Data Schedule for Attached
Franklin Minnesota Insured
Tax-Free Income Fund Class II
EX-27.B-9 Financial Data Schedule for Attached
Franklin Ohio Insured Tax-Free
Income Fund Class I
EX-27.B-10 Financial Data Schedule for Attached
Franklin Ohio Insured Tax-Free
Income Fund Class II
EX-27.B-11 Financial Data Schedule for Attached
Franklin Puerto Rico Tax-Free
Income Fund Class I
EX-27.B-12 Financial Data Schedule for Attached
Franklin Puerto Rico Tax-Free
Income Fund Class II
EX-27.B-13 Financial Data Schedule for Attached
Franklin High-Yield Income
Fund Class I
EX-27.B-14 Financial Data Schedule for Attached
Franklin High-Yield Tax-Free
Income Fund Class II
EX-27.B-15 Financial Data Schedule for Attached
Franklin Pennsylvania Tax-Free
Income Fund Class I
EX-27.B-16 Financial Data Schedule for Attached
Franklin Pennsylvania Tax-Free
` Income FundClass II
EX-27.B-17 Financial Data Schedule for Attached
Franklin Colorado Tax-Free
Income Fund Class I
EX-27.B-18 Financial Data Schedule for Attached
Franklin Colorado Tax-Free
Income Fund Class II
EX-27.B-19 Financial Data Schedule for Attached
Franklin Michigan Tax-Free
Income Fund
EX-27.B-20 Financial Data Schedule for Attached
Franklin Georgia Tax-Free
Income Fund Class I
EX-27.B-21 Financial Data Schedule for Attached
Franklin Georgia Tax-Free
Income Fund Class II
EX-27.B-22 Financial Data Schedule for Attached
Franklin Missouri Tax-Free
Income Fund Class I
EX-27.B-23 Financial Data Schedule for Attached
Franklin Missouri Tax-Free
Income Fund Class II
EX-27.B-24 Financial Data Schedule for Attached
Franklin Oregon Tax-Free
Income Fund Class I
EX-27.B-25 Financial Data Schedule for Attached
Franklin Oregon Tax-Free
Income Fund Class II
EX-27.B-26 Financial Data Schedule for Attached
Franklin Texas Tax-Free Income
Fund Class I
EX-27.B-27 Financial Data Schedule for Attached
Franklin Texas Tax-Free Income
Fund Class II
EX-27.B-28 Financial Data Schedule for Attached
Franklin Virginia Tax-Free
Income Fund Class I
EX-27.B-29 Financial Data Schedule for Attached
Franklin Virginia Tax-Free
Income Fund Class II
EX-27.B-30 Financial Data Schedule for Attached
Franklin Alabama Tax-Free
Income Fund Class I
EX-27.B-31 Financial Data Schedule for Attached
Franklin Alabama Tax-Free
Income Fund Class II
EX-27.B-32 Financial Data Schedule for Attached
Franklin Florida Tax-Free
Income Fund Class I
EX-27.B-33 Financial Data Schedule for Attached
Franklin Florida Tax-Free
Income Fund Class II
EX-27.B-34 Financial Data Schedule for Attached
Franklin Indiana Tax-Free
Income Fund
EX-27.B-35 Financial Data Schedule for Attached
Franklin Louisiana Tax-Free
Income Fund Class I
EX-27.B-36 Financial Data Schedule for Attached
Franklin Louisiana Tax-Free
Income Fund Class II
EX-27.B-37 Financial Data Schedule for Attached
Franklin North Carolina
Tax-Free Income Fund Class I
EX-27.B-38 Financial Data Schedule for Attached
Franklin North Carolina
Tax-Free Income Fund Class II
EX-27.B-39 Financial Data Schedule for Attached
Franklin Arizona Tax-Free
Income Fund Class I
EX-27.B-40 Financial Data Schedule for Attached
Franklin Arizona Tax-Free
Income Fund Class II
EX-27.B-41 Financial Data Schedule for Attached
Franklin New Jersey Tax-Free
Income Fund Class I
EX-27.B-42 Financial Data Schedule for Attached
Franklin New Jersey Tax-Free
Income Fund Class II
EX-27.B-43 Financial Data Schedule for Attached
Franklin Connecticut Tax-Free
Income Fund Class I
EX-27.B-44 Financial Data Schedule for Attached
Franklin Connecticut Tax-Free
Income Fund Class II
EX-27.B-45 Financial Data Schedule for Attached
Franklin Maryland Tax-Free
Income Fund Class I
EX-27.B-46 Financial Data Schedule for Attached
Franklin Maryland Tax-Free
Income Fund Class II
EX-27.B-47 Financial Data Schedule for Attached
Franklin Kentucky Tax-Free
Income Fund
EX-27.B-48 Financial Data Schedule for Attached
Franklin Federal Intermediate-
Term Tax-Free Income Fund
EX-27.B-49 Financial Data Schedule for Attached
Franklin Arizona Insured
Tax-Fee Income Fund
EX-27.B-50 Financial Data Schedule for Attached
Franklin Florida Insured
Tax-Fee Income Fund
*Incorporated by Reference
FRANKLIN TAX-FREE TRUST
on behalf of
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN TAX-FREE TRUST, a
Massachusetts business trust, hereinafter called the "Trust" on behalf of the
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND, hereinafter called the "Fund", a
series of Franklin Tax-Free Trust, and FRANKLIN INVESTMENT ADVISORY SERVICES,
INC., a Connecticut Corporation, hereinafter called the "Manager."
WHEREAS, the Trust has been organized and operates as an investment
company registered under the Investment Company Act of 1940 for the purpose of
investing and reinvesting its assets in securities, as set forth in its
Agreement and Declaration of Trust, its By-Laws and its Registration Statements
under the Investment Company Act of 1940 and the Securities Act of 1933, all as
heretofore amended and supplemented; and the Trust desires to avail itself of
the services, information, advice, assistance and facilities of an investment
manager and to have an investment manager perform various management,
statistical, research, investment advisory and other services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisor's Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to manage the
investment and reinvestment of the Fund's assets and to administer its affairs,
subject to the direction of the Board of Trustees and the officers of the Trust,
for the period and on the terms hereinafter set forth. The Manager hereby
accepts such employment and agrees during such period to render the services and
to assume the obligations herein set forth for the compensation herein provided.
The Manager shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise), have no authority to act for or represent the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER.
The Manager undertakes to provide the services hereinafter set
forth and to assume the following obligations:
A. OFFICE SPACE, FURNISHINGS, FACILITIES, EQUIPMENT, AND PERSONNEL. The
Manager shall furnish to the Trust and the Fund adequate (i) office space, which
may be space within the offices of the Manager or in such other place as may be
agreed upon from time to time, (ii) office furnishings, facilities and equipment
as may be reasonably required for managing the affairs and conducting the
business of the Trust and the Fund, including complying with the securities
reporting requirements of the United States and the various states in which the
Trust does business, conducting correspondence and other communications with the
shareholders of the Fund, maintaining all internal bookkeeping, accounting and
auditing services and records in connection with the Fund's investment and
business activities, and computing net asset value. The Manager shall employ or
provide and compensate the executive, secretarial and clerical personnel
necessary to provide such services. The Manager shall also compensate all
officers and employees of the Trust who are officers or employees of the
Manager.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the assets of the Fund subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to time.
In pursuance of the foregoing, the Manager shall make all determinations with
respect to the investment of the assets of the Fund and the purchase and sale of
its portfolio securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall also include
determining the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the Fund's portfolio securities shall
be exercised. The Manager shall render regular reports to the Trust, at regular
meetings of the Board of Trustees and at such other times as may be reasonably
requested by the Trust's Board of Trustees, of (i) the decisions which it has
made with respect to the investment of the assets of the Fund and the purchase
and sale of its portfolio securities, (ii) the reasons for such decisions and
(iii) the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
portfolio transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical quotations and other information to the Fund and the Manager in
accord with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board determines that the
Fund will benefit, directly or indirectly, by doing so, the Manager may place
orders with a broker who charges a commission for that transaction which is in
excess of the amount of commission that another broker would have charged for
effecting that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e)(3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Manager agree that the Manager shall select
brokers for the execution of the Fund's portfolio transactions from among:
(i) Those brokers and dealers who provide
quotations and other services to the Fund, specifically including the quotations
necessary to determine the Fund's net assets, in such amount of total brokerage
as may reasonably be required in light of such services;
(ii) Those brokers and dealers who supply
research, statistical and other data to the Manager or its affiliates which the
Manager or its affiliates may lawfully and appropriately use in their investment
advisory capacities, which relate directly to portfolio securities, actual or
potential, of the Fund or which place the Manager in a better position to make
decisions in connection with the management of the Fund's assets and portfolios,
whether or not such data may also be useful to the Manager and its affiliates in
managing other portfolios or advising other clients, in such amount of total
brokerage as may reasonably be required.
Provided that the Trust's officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be considered as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should tender
securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
Federal securities laws and rules thereunder and the rules of any securities
exchange or association of which it may be a member. Neither the Manager nor
Distributors shall be obligated to make any additional commitments of capital,
expense or personnel beyond that already committed (other than normal periodic
fees or payments necessary to maintain its corporate existence and membership in
the National Association of Securities Dealers, Inc.) as of the date of this
Agreement and this Agreement shall not obligate the Manager or Distributors (i)
to act pursuant to the foregoing requirement under any circumstances in which
they might reasonably believe that liability might be imposed upon them as a
result of so acting, or (ii) to institute legal or other proceedings to collect
fees which may be considered to be due from others to it as a result of such a
tender, unless the Trust shall enter into an agreement with the Manager to
reimburse them for all expenses connected with attempting to collect such fees
including legal fees and expenses and that portion of the compensation due to
their employees which is attributable to the time involved in attempting to
collect such fees .
(d) The Manager shall render regular reports to the Trust , not
more frequently than quarterly, of how much total brokerage business has been
placed, by the Manager with brokers falling into each of the foregoing
categories and the manner in which the allocation has been accomplished.
(e) The Manager agrees that no investment decision will be made
or influenced by a desire to provide brokerage for allocation in accordance with
the foregoing, and that the right to make such allocation of brokerage shall not
interfere with the Manager's paramount duty to obtain the best net price and
execution for the Fund.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Underwriter of the Fund in the
preparation of registration statements, reports and other documents required by
Federal and state securities laws and with such information as the Underwriter
may reasonably request for use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and distribution of the
Fund's shares.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make
available its officers and employees to the Board of Trustees and
officers of the Trust for consultation and discussions regarding
the administrative management of the Fund and its investment
activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its own
expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees to the Manager as provided herein;
B. Expenses of all audits by independent public
accountants;
C. Expenses of transfer agent, registrar, custodian,
dividend disbursing agent and shareholder record-keeping services;
D. Expenses of obtaining quotations for calculating the
value of the Fund's net assets;
E. Salaries and other compensation of any of its executive
officers who are not officers, trustees, stockholders or
employees of the Manager;
F. Taxes levied against the Trust or the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees,
reports to the Trust to its shareholders, the filing of reports
with regulatory bodies and the maintenance of the Trust's legal
existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for
sale;
K. Costs of printing share certificates representing
shares of the Fund;
L. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or
any of its affiliates;
M. Trade association dues; and
N. Its pro rata portion of the fidelity bond insurance
premium.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a monthly management fee in
cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, on the first business day of each month
in each year as compensation for the services rendered and obligations assumed
by the Manager during the preceding month. The initial management fee under this
Agreement shall be payable on the first business day of the first month
following the effective date of this Agreement, and shall be reduced by the
amount of any advance payments made by the Trust relating to the previous month.
A . For purposes of calculating such fee, the value of the net assets of
the Fund shall be the net assets computed as of the close of business on the
last business day of the month preceding the month in which the payment is being
made, determined in the same manner as such Fund uses to compute the value of
its net assets in connection with the determination of the net asset value of
such Fund's shares, all as set forth more fully in such Fund's current
prospectus. The rate of the monthly management fee payable by the Fund shall be
as follows:
5/96 of 1% of the value of its net assets up to
and including $100,000,000; and
1/24 of 1% of the value of its net assets over
$100,000,000 up to and including $250,000,000; and
9/240 of 1% of the value of its net assets in
excess of $250,000,000.
B. The Management fee payable by the Fund shall be reduced or eliminated
to the extent that Distributors has actually received cash payments of tender
offer solicitation fees less certain costs and expenses incurred in connection
therewith; and to the extent necessary to comply with the limitations on
expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any month for the
Fund, the monthly management fee for such Fund shall be prorated for the portion
of any month in which this Agreement is in effect which is not a complete month
according to the proportion which the number of calendar days in the fiscal
quarter during which the Agreement is in effect bears to the number of calendar
days in the month, and shall be payable within 10 days after the date of
termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund hereunder
are not to be deemed exclusive, and the Manager and any of its affiliates shall
be free to render similar services to others. Subject to and in accordance with
the Agreement and Declaration of Trust and By-Laws of the Trust and to Section
10(a) of the Investment Company Act of 1940, it is understood that Trustees,
officers, agents and shareholders of the Trust are or may be interested in the
Manager or its affiliates as trustees, directors, officers, agents or
stockholders, and that directors, officers, agents or stockholders of the
Manager or its affiliates are or may be interested in the Trust as Trustees,
officers, agents, shareholders or otherwise, that the Manager or its affiliates
may be interested in the Fund as shareholders or otherwise; and that the effect
of any such interests shall be governed by said Agreement and Declaration of
Trust, the By-Laws and the Investment Company Act of 1940.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of the
Manager, the Manager shall not be subject to liability to the Trust or of the
Fund or to any shareholder of the Fund for any act or omission in the course of,
or connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse the
Fund for any and all costs, expenses, and counsel and trustees' fees reasonably
incurred by the Fund in the preparation, printing and distribution of proxy
statements, amendments to its Registration Statement, holdings of meetings of
its shareholders or Trustees, the conduct of factual investigations, any legal
or administrative proceedings (including any applications for exemptions or
determinations by the Securities and Exchange Commission) which the Fund incur
as the result of action or inaction of the Manager or any of its affiliates or
any of their officers, directors, employees or shareholders where the action or
inaction necessitating such expenditures (i) is directly or indirectly related
to any transactions or proposed transaction in the shares or control of the
Manager or its affiliates (or litigation related to any pending or proposed or
future transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or, (ii)
is within the control of the Manager or any of its affiliates or any of their
officers, trustees, employees or shareholders. The Manager shall not be
obligated pursuant to the provisions of this Subsection 6(B), to reimburse the
Fund for any expenditures related to the institution of an administrative
proceeding or civil litigation by the Trust or the Fund's shareholders seeking
to recover all or a portion of the proceeds derived by any shareholder of the
Manager or any of its affiliates from the sale of his shares of the Manager, or
similar matters. So long as this Agreement is in effect the Manager shall pay to
the Fund the amount due for expenses subject to this Subsection 6(B) Agreement
within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Fund may have or may assert against the Manager or others for costs, expenses or
damages heretofore incurred by the Fund or for costs, expenses or damages the
Fund may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any Trustee
or officer of the Trust, or director or officer of the Manager, from liability
in violation of Sections 17(h) and (i) of the Investment Company Act of 1940.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and
shall continue in effect for two (2) years. The Agreement is renewable annually
thereafter for the Fund for successive periods not to exceed one (1) year (i) by
a vote of a majority of the outstanding voting securities of the Fund or by a
vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of
the Trustees of the Trust who are not parties to the Agreement or interested
persons of any parties to the Agreement (other than as Trustees of the Trust)
cast in person at a meeting called for the purpose of voting on the Agreement.
B. This Agreement.
(i) may at anytime be terminated with respect to the Fund without the
payment of any penalty either by vote of the Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Fund seeking
to terminate the Agreement, on 30 days' written notice to the Manager;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii)may at any time be terminated by the Manager with respect to the
Fund on 30 days' written notice to the Fund.
C. As used in this Section the terms "assignment," "interested person" and
"vote of a majority of the outstanding voting securities" shall have the
meanings set forth for any such terms in the Investment Company Act of 1940, as
amended.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the
other party at any office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby.
9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Connecticut.
10. LIMITATION OF LIABILITY. The Manager acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth in
Article VIII of its Agreement and Declaration of Trust. The Manager agrees that
the Trust's obligations hereunder shall be limited to the assets of the Fund,
and that the Manager shall not seek satisfaction of any such obligation from any
shareholder of the Fund nor from any trustee, officer, employee or agent of the
Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 1st day of October, 1996.
FRANKLIN TAX-FREE TRUST on behalf of
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
By:/S/DEBORAH R. GATZEK
- -----------------------
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN INVESTMENT ADVISORY SERVICES, INC.
By:/S/RUPERT H. JOHNSON, JR.
- ----------------------------
Rupert H. Johnson, Jr.
Senior Vice President
TERMINATION OF AGREEMENT
Franklin Tax-Free Trust and Franklin Advisers, Inc., hereby agree that the
Management Agreement between them dated December 1, 1986 is terminated with
respect to the Franklin Connecticut Tax-Free Income Fund, and only with respect
to that Fund, effective as of the date of the Management Agreement above.
FRANKLIN TAX-FREE TRUST
By:/S/DEBORAH R. GATZEK
- -----------------------
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:/S/HARMON E. BURNS
- ---------------------
Harmon E. Burns
Executive Vice President
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 24
to the Registration Statement of Franklin Tax-Free Trust on Form N-1A File Nos.
2-94222 and 811-4149 of our report dated April 4, 1997 on our audit of the
financial statements and financial highlights of Franklin Tax-Free Trust, which
report is included in the Annual Report to Shareholders for the year ended
February 28, 1997, which is incorporated by reference in the Registration
Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
June 26, 1997
FRANKLIN TAX-FREE TRUST
on behalf of FRANKLIN MICHIGAN TAX-FREE INCOME FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by
Franklin Tax-Free Trust ("Trust") for the use of its series named Franklin
Michigan Tax-Free Income Fund (the "Fund"), which Plan shall take effect on
the date the Fund becomes effective (the "Effective Date of the Plan"). The
Plan has been approved by a majority of the Board of Trustees of the Trust
(the "Board"), including a majority of the trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan (the "non-interested trustees"), cast in person at
a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Trust on behalf of
the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded
that the compensation of Advisers, under the Management Agreement was fair
and not excessive; however, the Board also recognized that uncertainty may
exist from time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or Distributors to
others may be deemed to constitute distribution expenses. Accordingly, the
Board determined that the Plan should provide for such payments and that
adoption of the Plan would be prudent and in the best interests of the Fund
and its shareholders. Such approval included a determination that in the
exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
l. The Fund shall reimburse Distributors or others for all expenses
incurred by Distributors or others in the promotion and distribution of the
shares of the Fund, including but not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparation and
distribution of sales literature and related expenses, advertisements, and
other distribution-related expenses, including a prorated portion of
Distributors' overhead expenses attributable to the distribution of Fund
shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates, which form of agreement has been
approved from time to time by the Board members, including the non-interested
Board members.
2. The maximum amount which may be reimbursed by the Fund to Distributors
or others pursuant to Paragraph 1 herein shall be 0.15% per annum of the
average daily net assets of the Fund. Said reimbursement shall be made
quarterly by the Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under
the Plan, and shall furnish the Board with such other information as the
Board may reasonably request in connection with the payments made under the
Plan in order to enable the Board to make an informed determination of
whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually
by a vote of the Board, including the non-interested trustees, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on behalf of the
Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 2 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by a vote of the non-interested
trustees cast in person at a meeting called for the purpose of voting on any
such amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Trust's non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed
to by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Michigan Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,563,176,153
<INVESTMENTS-AT-VALUE> 1,660,882,171
<RECEIVABLES> 26,606,685
<ASSETS-OTHER> 1,418,023
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,688,906,879
<PAYABLE-FOR-SECURITIES> 1,480,589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,818,069
<TOTAL-LIABILITIES> 5,298,228
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,585,918,615
<SHARES-COMMON-STOCK> 136,753,285
<SHARES-COMMON-PRIOR> 139,005,800
<ACCUMULATED-NII-CURRENT> 20,740
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (36,722)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 97,706,018
<NET-ASSETS> 1,683,608,651
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 106,225,193
<OTHER-INCOME> 0
<EXPENSES-NET> (10,229,444)
<NET-INVESTMENT-INCOME> 95,995,749
<REALIZED-GAINS-CURRENT> 189,172
<APPREC-INCREASE-CURRENT> (14,843,798)
<NET-CHANGE-FROM-OPS> 81,341,123
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (96,336,110)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,746,969
<NUMBER-OF-SHARES-REDEEMED> (21,353,609)
<SHARES-REINVESTED> 3,354,125
<NET-CHANGE-IN-ASSETS> (29,582,039)
<ACCUMULATED-NII-PRIOR> 1,118,209
<ACCUMULATED-GAINS-PRIOR> (225,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,848,890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,229,444
<AVERAGE-NET-ASSETS> 1,690,521,639
<PER-SHARE-NAV-BEGIN> 12.270
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> (.114)
<PER-SHARE-DIVIDEND> (.696)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.150
<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 28, 1997 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> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,563,176,153
<INVESTMENTS-AT-VALUE> 1,660,882,171
<RECEIVABLES> 26,606,685
<ASSETS-OTHER> 1,418,023
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,688,906,879
<PAYABLE-FOR-SECURITIES> 1,480,589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,818,069
<TOTAL-LIABILITIES> 5,298,228
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,585,918,615
<SHARES-COMMON-STOCK> 1,762,895
<SHARES-COMMON-PRIOR> 662,359
<ACCUMULATED-NII-CURRENT> 20,740
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (36,722)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 97,706,018
<NET-ASSETS> 1,683,608,651
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 106,225,193
<OTHER-INCOME> 0
<EXPENSES-NET> (10,229,444)
<NET-INVESTMENT-INCOME> 95,995,749
<REALIZED-GAINS-CURRENT> 189,172
<APPREC-INCREASE-CURRENT> (14,843,798)
<NET-CHANGE-FROM-OPS> 81,341,123
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (757,108)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,172,093
<NUMBER-OF-SHARES-REDEEMED> (110,718)
<SHARES-REINVESTED> 39,161
<NET-CHANGE-IN-ASSETS> (29,582,039)
<ACCUMULATED-NII-PRIOR> 1,118,209
<ACCUMULATED-GAINS-PRIOR> (225,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,848,890
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,229,444
<AVERAGE-NET-ASSETS> 1,690,521,639
<PER-SHARE-NAV-BEGIN> 12.310
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> (.095)
<PER-SHARE-DIVIDEND> (.625)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.210
<EXPENSE-RATIO> 1.170
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 314,830,951
<INVESTMENTS-AT-VALUE> 330,462,626
<RECEIVABLES> 18,922,340
<ASSETS-OTHER> 259,202
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 349,644,168
<PAYABLE-FOR-SECURITIES> 17,431,704
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 769,618
<TOTAL-LIABILITIES> 18,201,322
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,595,052
<SHARES-COMMON-STOCK> 28,162,462
<SHARES-COMMON-PRIOR> 25,881,419
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (36,705)
<ACCUMULATED-NET-GAINS> 1,252,824
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,631,675
<NET-ASSETS> 331,442,846
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,219,368
<OTHER-INCOME> 0
<EXPENSES-NET> (2,138,484)
<NET-INVESTMENT-INCOME> 17,080,884
<REALIZED-GAINS-CURRENT> 4,857,234
<APPREC-INCREASE-CURRENT> (7,367,674)
<NET-CHANGE-FROM-OPS> 14,570,444
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,006,052)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (36,375)
<NUMBER-OF-SHARES-SOLD> 4,567,263
<NUMBER-OF-SHARES-REDEEMED> (2,926,859)
<SHARES-REINVESTED> 640,639
<NET-CHANGE-IN-ASSETS> 27,155,307
<ACCUMULATED-NII-PRIOR> 156,087
<ACCUMULATED-GAINS-PRIOR> (3,604,410)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,649,833
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,138,484
<AVERAGE-NET-ASSETS> 310,546,677
<PER-SHARE-NAV-BEGIN> 11.650
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> (0.098)
<PER-SHARE-DIVIDEND> (0.642)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.540
<EXPENSE-RATIO> 0.680
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 314,830,951
<INVESTMENTS-AT-VALUE> 330,462,626
<RECEIVABLES> 18,922,340
<ASSETS-OTHER> 259,202
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 349,644,168
<PAYABLE-FOR-SECURITIES> 17,431,704
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 769,618
<TOTAL-LIABILITIES> 18,201,322
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,595,052
<SHARES-COMMON-STOCK> 550,431
<SHARES-COMMON-PRIOR> 236,038
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (36,705)
<ACCUMULATED-NET-GAINS> 1,252,824
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,631,675
<NET-ASSETS> 331,442,846
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,219,368
<OTHER-INCOME> 0
<EXPENSES-NET> (2,138,484)
<NET-INVESTMENT-INCOME> 17,080,884
<REALIZED-GAINS-CURRENT> 4,857,234
<APPREC-INCREASE-CURRENT> (7,367,674)
<NET-CHANGE-FROM-OPS> 14,570,444
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (230,919)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (330)
<NUMBER-OF-SHARES-SOLD> 316,475
<NUMBER-OF-SHARES-REDEEMED> (17,305)
<SHARES-REINVESTED> 15,223
<NET-CHANGE-IN-ASSETS> 27,155,307
<ACCUMULATED-NII-PRIOR> 156,087
<ACCUMULATED-GAINS-PRIOR> (3,604,410)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,649,833
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,138,484
<AVERAGE-NET-ASSETS> 310,546,677
<PER-SHARE-NAV-BEGIN> 11.690
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> (0.094)
<PER-SHARE-DIVIDEND> (0.576)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.590
<EXPENSE-RATIO> 1.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,054,920,018
<INVESTMENTS-AT-VALUE> 1,112,834,468
<RECEIVABLES> 20,707,224
<ASSETS-OTHER> 886,087
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,134,427,779
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,728,808
<TOTAL-LIABILITIES> 2,728,808
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,069,419,141
<SHARES-COMMON-STOCK> 92,589,471
<SHARES-COMMON-PRIOR> 92,289,436
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (213,723)
<ACCUMULATED-NET-GAINS> 4,579,103
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,914,450
<NET-ASSETS> 1,131,698,971
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 68,766,547
<OTHER-INCOME> 0
<EXPENSES-NET> (7,016,962)
<NET-INVESTMENT-INCOME> 61,749,585
<REALIZED-GAINS-CURRENT> 4,589,908
<APPREC-INCREASE-CURRENT> (11,934,831)
<NET-CHANGE-FROM-OPS> 54,404,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (60,807,842)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (409,830)
<NUMBER-OF-SHARES-SOLD> 7,814,075
<NUMBER-OF-SHARES-REDEEMED> (10,033,049)
<SHARES-REINVESTED> 2,519,009
<NET-CHANGE-IN-ASSETS> 9,561,500
<ACCUMULATED-NII-PRIOR> (111,019)
<ACCUMULATED-GAINS-PRIOR> (10,805)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,284,581
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,016,962
<AVERAGE-NET-ASSETS> 1,119,044,339
<PER-SHARE-NAV-BEGIN> 12.090
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.089)
<PER-SHARE-DIVIDEND> (.661)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.000
<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 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,054,920,018
<INVESTMENTS-AT-VALUE> 1,112,834,468
<RECEIVABLES> 20,707,224
<ASSETS-OTHER> 886,087
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,134,427,779
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,728,808
<TOTAL-LIABILITIES> 2,728,808
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,069,419,141
<SHARES-COMMON-STOCK> 1,670,727
<SHARES-COMMON-PRIOR> 550,577
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (213,723)
<ACCUMULATED-NET-GAINS> 4,579,103
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,914,450
<NET-ASSETS> 1,131,698,971
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 68,766,547
<OTHER-INCOME> 0
<EXPENSES-NET> (7,016,962)
<NET-INVESTMENT-INCOME> 61,749,585
<REALIZED-GAINS-CURRENT> 4,589,908
<APPREC-INCREASE-CURRENT> (11,934,831)
<NET-CHANGE-FROM-OPS> 54,404,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (634,617)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,155,661
<NUMBER-OF-SHARES-REDEEMED> (72,368)
<SHARES-REINVESTED> 36,857
<NET-CHANGE-IN-ASSETS> 9,561,500
<ACCUMULATED-NII-PRIOR> (111,019)
<ACCUMULATED-GAINS-PRIOR> (10,805)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,284,581
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,016,962
<AVERAGE-NET-ASSETS> 1,119,044,339
<PER-SHARE-NAV-BEGIN> 12.140
<PER-SHARE-NII> .590
<PER-SHARE-GAIN-APPREC> (.069)
<PER-SHARE-DIVIDEND> (.591)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.070
<EXPENSE-RATIO> 1.190
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 464,397,918
<INVESTMENTS-AT-VALUE> 485,758,402
<RECEIVABLES> 5,289,021
<ASSETS-OTHER> 62,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 491,110,365
<PAYABLE-FOR-SECURITIES> 2,978,548
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,160,674
<TOTAL-LIABILITIES> 4,139,222
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 465,891,428
<SHARES-COMMON-STOCK> 40,157,975
<SHARES-COMMON-PRIOR> 40,539,811
<ACCUMULATED-NII-CURRENT> 263,020
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (543,789)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,360,484
<NET-ASSETS> 486,971,143
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29,867,279
<OTHER-INCOME> 0
<EXPENSES-NET> (3,238,308)
<NET-INVESTMENT-INCOME> 26,628,971
<REALIZED-GAINS-CURRENT> (540,028)
<APPREC-INCREASE-CURRENT> (4,659,743)
<NET-CHANGE-FROM-OPS> 21,429,200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,722,891)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,044,882
<NUMBER-OF-SHARES-REDEEMED> (4,566,009)
<SHARES-REINVESTED> 1,139,291
<NET-CHANGE-IN-ASSETS> (6,320,038)
<ACCUMULATED-NII-PRIOR> 489,930
<ACCUMULATED-GAINS-PRIOR> (3,761)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,439,817
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,238,308
<AVERAGE-NET-ASSETS> 487,098,398
<PER-SHARE-NAV-BEGIN> 12.140
<PER-SHARE-NII> .650
<PER-SHARE-GAIN-APPREC> (.120)
<PER-SHARE-DIVIDEND> (.660)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.010
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 464,397,918
<INVESTMENTS-AT-VALUE> 485,758,402
<RECEIVABLES> 5,289,021
<ASSETS-OTHER> 62,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 491,110,365
<PAYABLE-FOR-SECURITIES> 2,978,548
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,160,674
<TOTAL-LIABILITIES> 4,139,222
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 465,891,428
<SHARES-COMMON-STOCK> 402,074
<SHARES-COMMON-PRIOR> 94,671
<ACCUMULATED-NII-CURRENT> 263,020
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (543,789)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,360,484
<NET-ASSETS> 486,971,143
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29,867,279
<OTHER-INCOME> 0
<EXPENSES-NET> (3,238,308)
<NET-INVESTMENT-INCOME> 26,628,971
<REALIZED-GAINS-CURRENT> (540,028)
<APPREC-INCREASE-CURRENT> (4,659,743)
<NET-CHANGE-FROM-OPS> 21,429,200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (132,990)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 335,271
<NUMBER-OF-SHARES-REDEEMED> (35,169)
<SHARES-REINVESTED> 7,301
<NET-CHANGE-IN-ASSETS> (6,320,038)
<ACCUMULATED-NII-PRIOR> 489,930
<ACCUMULATED-GAINS-PRIOR> (3,761)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,439,817
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,238,308
<AVERAGE-NET-ASSETS> 487,098,398
<PER-SHARE-NAV-BEGIN> 12.170
<PER-SHARE-NII> .590
<PER-SHARE-GAIN-APPREC> (.123)
<PER-SHARE-DIVIDEND> (.587)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.050
<EXPENSE-RATIO> 1.230
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 667,033,087
<INVESTMENTS-AT-VALUE> 703,583,629
<RECEIVABLES> 12,205,291
<ASSETS-OTHER> 25,227
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 715,814,147
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,668,472
<TOTAL-LIABILITIES> 1,668,472
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 678,915,521
<SHARES-COMMON-STOCK> 57,279,612
<SHARES-COMMON-PRIOR> 56,120,455
<ACCUMULATED-NII-CURRENT> (258,857)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,061,531)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 36,550,542
<NET-ASSETS> 714,145,675
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,294,708
<OTHER-INCOME> 0
<EXPENSES-NET> (4,502,352)
<NET-INVESTMENT-INCOME> 37,792,356
<REALIZED-GAINS-CURRENT> 4,543,907
<APPREC-INCREASE-CURRENT> (5,685,110)
<NET-CHANGE-FROM-OPS> 36,651,153
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 37,482,619
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,875,366
<NUMBER-OF-SHARES-REDEEMED> (6,187,100)
<SHARES-REINVESTED> 1,470,891
<NET-CHANGE-IN-ASSETS> 22,277,226
<ACCUMULATED-NII-PRIOR> (53,972)
<ACCUMULATED-GAINS-PRIOR> (5,605,438)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,391,314
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,502,352
<AVERAGE-NET-ASSETS> 697,533,810
<PER-SHARE-NAV-BEGIN> 12.220
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.029)
<PER-SHARE-DIVIDEND> (.661)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.190
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 667,033,087
<INVESTMENTS-AT-VALUE> 703,583,629
<RECEIVABLES> 12,205,291
<ASSETS-OTHER> 25,227
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 715,814,147
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,668,472
<TOTAL-LIABILITIES> 1,668,472
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 678,915,521
<SHARES-COMMON-STOCK> 1,289,184
<SHARES-COMMON-PRIOR> 496,533
<ACCUMULATED-NII-CURRENT> (258,857)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,061,531)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 36,550,542
<NET-ASSETS> 714,145,675
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,294,708
<OTHER-INCOME> 0
<EXPENSES-NET> (4,502,352)
<NET-INVESTMENT-INCOME> 37,792,356
<REALIZED-GAINS-CURRENT> 4,543,907
<APPREC-INCREASE-CURRENT> (5,685,110)
<NET-CHANGE-FROM-OPS> 36,651,153
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (514,622)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 868,125
<NUMBER-OF-SHARES-REDEEMED> (105,328)
<SHARES-REINVESTED> 29,854
<NET-CHANGE-IN-ASSETS> 22,277,226
<ACCUMULATED-NII-PRIOR> (53,972)
<ACCUMULATED-GAINS-PRIOR> (5,605,438)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,391,314
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,502,352
<AVERAGE-NET-ASSETS> 697,533,810
<PER-SHARE-NAV-BEGIN> 12.260
<PER-SHARE-NII> .590
<PER-SHARE-GAIN-APPREC> (.022)
<PER-SHARE-DIVIDEND> (.588)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.240
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 179,801,629
<INVESTMENTS-AT-VALUE> 188,637,355
<RECEIVABLES> 5,857,476
<ASSETS-OTHER> 205,695
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,700,526
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 496,088
<TOTAL-LIABILITIES> 496,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,237,655
<SHARES-COMMON-STOCK> 16,724,178
<SHARES-COMMON-PRIOR> 16,446,495
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (107,458)
<ACCUMULATED-NET-GAINS> 238,515
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,835,726
<NET-ASSETS> 194,204,438
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,160,727
<OTHER-INCOME> 0
<EXPENSES-NET> (1,412,613)
<NET-INVESTMENT-INCOME> 10,748,114
<REALIZED-GAINS-CURRENT> 2,031,659
<APPREC-INCREASE-CURRENT> (1,447,567)
<NET-CHANGE-FROM-OPS> 11,332,206
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,680,927)
<DISTRIBUTIONS-OF-GAINS> (1,706,390)
<DISTRIBUTIONS-OTHER> (107,458)
<NUMBER-OF-SHARES-SOLD> 1,806,977
<NUMBER-OF-SHARES-REDEEMED> (2,068,913)
<SHARES-REINVESTED> 539,619
<NET-CHANGE-IN-ASSETS> 3,094,533
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (73,370)
<OVERDISTRIB-NII-PRIOR> (15,174)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,083,818
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,412,613
<AVERAGE-NET-ASSETS> 191,317,858
<PER-SHARE-NAV-BEGIN> 11.590
<PER-SHARE-NII> 0.650
<PER-SHARE-GAIN-APPREC> 0.025
<PER-SHARE-DIVIDEND> (0.651)
<PER-SHARE-DISTRIBUTIONS> (0.104)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.510
<EXPENSE-RATIO> 0.730
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 179,801,629
<INVESTMENTS-AT-VALUE> 188,637,355
<RECEIVABLES> 5,857,476
<ASSETS-OTHER> 205,695
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,700,526
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 496,088
<TOTAL-LIABILITIES> 496,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,237,655
<SHARES-COMMON-STOCK> 145,675
<SHARES-COMMON-PRIOR> 45,905
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (107,458)
<ACCUMULATED-NET-GAINS> 238,515
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,835,726
<NET-ASSETS> 194,204,438
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,160,727
<OTHER-INCOME> 0
<EXPENSES-NET> (1,412,613)
<NET-INVESTMENT-INCOME> 10,748,114
<REALIZED-GAINS-CURRENT> 2,031,659
<APPREC-INCREASE-CURRENT> (1,447,567)
<NET-CHANGE-FROM-OPS> 11,332,206
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (52,013)
<DISTRIBUTIONS-OF-GAINS> (13,384)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 144,789
<NUMBER-OF-SHARES-REDEEMED> (48,280)
<SHARES-REINVESTED> 3261
<NET-CHANGE-IN-ASSETS> 3,094,533
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (73,370)
<OVERDISTRIB-NII-PRIOR> (15,174)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,083,818
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,412,613
<AVERAGE-NET-ASSETS> 191,317,858
<PER-SHARE-NAV-BEGIN> 11.620
<PER-SHARE-NII> 0.580
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> (0.586)
<PER-SHARE-DISTRIBUTIONS> (0.104)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.530
<EXPENSE-RATIO> 1.300
<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 28,1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 4,406,063,329
<INVESTMENTS-AT-VALUE> 4,669,455,512
<RECEIVABLES> 109,220,172
<ASSETS-OTHER> 9,472,987
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,788,148,671
<PAYABLE-FOR-SECURITIES> 76,833,016
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,658,123
<TOTAL-LIABILITIES> 88,491,139
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,487,489,895
<SHARES-COMMON-STOCK> 402,071,454
<SHARES-COMMON-PRIOR> 338,524,063
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,265,863)
<ACCUMULATED-NET-GAINS> (47,958,683)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 263,392,183
<NET-ASSETS> 4,699,657,532
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 292,727,577
<OTHER-INCOME> 0
<EXPENSES-NET> (26,433,278)
<NET-INVESTMENT-INCOME> 266,294,299
<REALIZED-GAINS-CURRENT> (1,562,428)
<APPREC-INCREASE-CURRENT> 23,745,558
<NET-CHANGE-FROM-OPS> 288,477,429
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (263,983,718)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (3,211,797)
<NUMBER-OF-SHARES-SOLD> 96,413,033
<NUMBER-OF-SHARES-REDEEMED> (42,224,510)
<SHARES-REINVESTED> 9,358,868
<NET-CHANGE-IN-ASSETS> 864,347,583
<ACCUMULATED-NII-PRIOR> 3,892,763
<ACCUMULATED-GAINS-PRIOR> (46,396,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,114,157
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26,433,278
<AVERAGE-NET-ASSETS> 4,164,490,786
<PER-SHARE-NAV-BEGIN> 11.190
<PER-SHARE-NII> .710
<PER-SHARE-GAIN-APPREC> .043
<PER-SHARE-DIVIDEND> (.733)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.210
<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 28,1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 4,406,063,329
<INVESTMENTS-AT-VALUE> 4,669,455,512
<RECEIVABLES> 109,220,172
<ASSETS-OTHER> 9,472,987
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,788,148,671
<PAYABLE-FOR-SECURITIES> 76,833,016
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,658,123
<TOTAL-LIABILITIES> 88,491,139
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,487,489,895
<SHARES-COMMON-STOCK> 17,258,275
<SHARES-COMMON-PRIOR> 4,286,570
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,265,863)
<ACCUMULATED-NET-GAINS> (47,958,683)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 263,392,183
<NET-ASSETS> 4,699,657,532
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 292,727,577
<OTHER-INCOME> 0
<EXPENSES-NET> (26,433,278)
<NET-INVESTMENT-INCOME> 266,294,299
<REALIZED-GAINS-CURRENT> (1,562,428)
<APPREC-INCREASE-CURRENT> 23,745,558
<NET-CHANGE-FROM-OPS> 288,477,429
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,203,344)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (54,066)
<NUMBER-OF-SHARES-SOLD> 13,680,514
<NUMBER-OF-SHARES-REDEEMED> (1,013,757)
<SHARES-REINVESTED> 304,948
<NET-CHANGE-IN-ASSETS> 864,347,583
<ACCUMULATED-NII-PRIOR> 3,892,763
<ACCUMULATED-GAINS-PRIOR> (46,396,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,114,157
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26,433,278
<AVERAGE-NET-ASSETS> 4,164,490,786
<PER-SHARE-NAV-BEGIN> 11.240
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .028
<PER-SHARE-DIVIDEND> (.668)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.260
<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 28, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 624,079,339
<INVESTMENTS-AT-VALUE> 658,202,955
<RECEIVABLES> 13,062,602
<ASSETS-OTHER> 534,597
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 671,800,154
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,526,502
<TOTAL-LIABILITIES> 1,526,502
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 632,974,219
<SHARES-COMMON-STOCK> 63,366,366
<SHARES-COMMON-PRIOR> 61,279,368
<ACCUMULATED-NII-CURRENT> 373,927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,801,890
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,123,616
<NET-ASSETS> 670,273,652
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,166,002
<OTHER-INCOME> 0
<EXPENSES-NET> (4,227,414)
<NET-INVESTMENT-INCOME> 37,938,588
<REALIZED-GAINS-CURRENT> 5,857,039
<APPREC-INCREASE-CURRENT> (8,671,626)
<NET-CHANGE-FROM-OPS> 35,124,001
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,722,774)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,716,132
<NUMBER-OF-SHARES-REDEEMED> (7,195,099)
<SHARES-REINVESTED> 1,565,965
<NET-CHANGE-IN-ASSETS> 27,317,141
<ACCUMULATED-NII-PRIOR> 532,306
<ACCUMULATED-GAINS-PRIOR> (3,055,149)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,181,417
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,227,414
<AVERAGE-NET-ASSETS> 650,769,462
<PER-SHARE-NAV-BEGIN> 10.44
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> (.044)
<PER-SHARE-DIVIDEND> (.606)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.39
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 232,716,576
<INVESTMENTS-AT-VALUE> 246,517,352
<RECEIVABLES> 5,642,445
<ASSETS-OTHER> 190,267
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 252,350,064
<PAYABLE-FOR-SECURITIES> 9,423,494
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 663,994
<TOTAL-LIABILITIES> 10,087,488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 229,047,335
<SHARES-COMMON-STOCK> 20,055,377
<SHARES-COMMON-PRIOR> 18,210,137
<ACCUMULATED-NII-CURRENT> 353,668
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (939,203)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,800,776
<NET-ASSETS> 242,262,576
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,255,850
<OTHER-INCOME> 0
<EXPENSES-NET> (1,624,906)
<NET-INVESTMENT-INCOME> 12,630,944
<REALIZED-GAINS-CURRENT> 947,229
<APPREC-INCREASE-CURRENT> (1,527,211)
<NET-CHANGE-FROM-OPS> 12,050,962
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,524,223)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,365,949
<NUMBER-OF-SHARES-REDEEMED> (2,036,403)
<SHARES-REINVESTED> 515,694
<NET-CHANGE-IN-ASSETS> 24,997,591
<ACCUMULATED-NII-PRIOR> 419,983
<ACCUMULATED-GAINS-PRIOR> (1,886,432)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,259,548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,624,906
<AVERAGE-NET-ASSETS> 226,157,409
<PER-SHARE-NAV-BEGIN> 11.840
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> (0.039)
<PER-SHARE-DIVIDEND> (0.661)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.800
<EXPENSE-RATIO> .710
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 232,716,576
<INVESTMENTS-AT-VALUE> 246,517,352
<RECEIVABLES> 5,642,445
<ASSETS-OTHER> 190,267
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 252,350,064
<PAYABLE-FOR-SECURITIES> 9,423,494
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 663,994
<TOTAL-LIABILITIES> 10,087,488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 229,047,335
<SHARES-COMMON-STOCK> 477,543
<SHARES-COMMON-PRIOR> 139,523
<ACCUMULATED-NII-CURRENT> 353,668
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (939,203)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,800,776
<NET-ASSETS> 242,262,576
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,255,850
<OTHER-INCOME> 0
<EXPENSES-NET> (1,624,906)
<NET-INVESTMENT-INCOME> 12,630,944
<REALIZED-GAINS-CURRENT> 947,229
<APPREC-INCREASE-CURRENT> (1,527,211)
<NET-CHANGE-FROM-OPS> 12,050,962
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (173,036)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 429,745
<NUMBER-OF-SHARES-REDEEMED> (101,865)
<SHARES-REINVESTED> 10,140
<NET-CHANGE-IN-ASSETS> 24,997,591
<ACCUMULATED-NII-PRIOR> 419,983
<ACCUMULATED-GAINS-PRIOR> (1,886,432)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,259,548
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,624,906
<AVERAGE-NET-ASSETS> 226,157,409
<PER-SHARE-NAV-BEGIN> 11.870
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> (0.024)
<PER-SHARE-DIVIDEND> (0.596)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.840
<EXPENSE-RATIO> 1.280
<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 28, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 28
<NAME> FRANKLIN MICHIGAN TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 3,712,326
<INVESTMENTS-AT-VALUE> 3,780,758
<RECEIVABLES> 82,206
<ASSETS-OTHER> 29,334
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,892,298
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,168
<TOTAL-LIABILITIES> 8,168
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,774,039
<SHARES-COMMON-STOCK> 372,799
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 38,055
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,604
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 68,432
<NET-ASSETS> 3,884,130
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 107,197
<OTHER-INCOME> 0
<EXPENSES-NET> (6,865)
<NET-INVESTMENT-INCOME> 100,332
<REALIZED-GAINS-CURRENT> 3,604
<APPREC-INCREASE-CURRENT> 68,432
<NET-CHANGE-FROM-OPS> 172,368
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (62,277)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 379,169
<NUMBER-OF-SHARES-REDEEMED> (11,156)
<SHARES-REINVESTED> 4,786
<NET-CHANGE-IN-ASSETS> 3,884,130
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 24,872
<AVERAGE-NET-ASSETS> 3,072,521
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .300
<PER-SHARE-GAIN-APPREC> .315
<PER-SHARE-DIVIDEND> (.195)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.420
<EXPENSE-RATIO> .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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 134,546,197
<INVESTMENTS-AT-VALUE> 142,293,046
<RECEIVABLES> 2,229,440
<ASSETS-OTHER> 254,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 144,777,146
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 389,795
<TOTAL-LIABILITIES> 389,795
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 137,528,810
<SHARES-COMMON-STOCK> 11,792,161
<SHARES-COMMON-PRIOR> 10,977,803
<ACCUMULATED-NII-CURRENT> 29,370
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (917,678)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,746,849
<NET-ASSETS> 144,387,351
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,551,082
<OTHER-INCOME> 0
<EXPENSES-NET> (1,048,121)
<NET-INVESTMENT-INCOME> 7,502,961
<REALIZED-GAINS-CURRENT> (83,809)
<APPREC-INCREASE-CURRENT> 63,481
<NET-CHANGE-FROM-OPS> 7,482,633
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,369,738)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,139,522
<NUMBER-OF-SHARES-REDEEMED> (1,635,886)
<SHARES-REINVESTED> 310,722
<NET-CHANGE-IN-ASSETS> 12,672,071
<ACCUMULATED-NII-PRIOR> 40,555
<ACCUMULATED-GAINS-PRIOR> (833,869)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 812,505
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,048,121
<AVERAGE-NET-ASSETS> 137,056,342
<PER-SHARE-NAV-BEGIN> 11.880
<PER-SHARE-NII> .647
<PER-SHARE-GAIN-APPREC> (.019)
<PER-SHARE-DIVIDEND> (.648)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.860
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 134,546,197
<INVESTMENTS-AT-VALUE> 142,293,046
<RECEIVABLES> 2,229,440
<ASSETS-OTHER> 254,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 144,777,146
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 389,795
<TOTAL-LIABILITIES> 389,795
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 137,528,810
<SHARES-COMMON-STOCK> 376,236
<SHARES-COMMON-PRIOR> 111,999
<ACCUMULATED-NII-CURRENT> 29,370
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (917,678)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,746,849
<NET-ASSETS> 144,387,351
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,551,082
<OTHER-INCOME> 0
<EXPENSES-NET> (1,048,121)
<NET-INVESTMENT-INCOME> 7,502,961
<REALIZED-GAINS-CURRENT> (83,809)
<APPREC-INCREASE-CURRENT> 63,481
<NET-CHANGE-FROM-OPS> 7,482,633
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (144,408)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 272,485
<NUMBER-OF-SHARES-REDEEMED> (15,969)
<SHARES-REINVESTED> 7,721
<NET-CHANGE-IN-ASSETS> 12,672,071
<ACCUMULATED-NII-PRIOR> 40,555
<ACCUMULATED-GAINS-PRIOR> (833,869)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 812,505
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,048,121
<AVERAGE-NET-ASSETS> 137,056,342
<PER-SHARE-NAV-BEGIN> 11.920
<PER-SHARE-NII> .577
<PER-SHARE-GAIN-APPREC> (.003)
<PER-SHARE-DIVIDEND> (.574)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.920
<EXPENSE-RATIO> 1.320
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 261,859,986
<INVESTMENTS-AT-VALUE> 274,817,564
<RECEIVABLES> 4,769,420
<ASSETS-OTHER> 147,623
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 279,734,607
<PAYABLE-FOR-SECURITIES> 4,711,321
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,163,956
<TOTAL-LIABILITIES> 5,875,277
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,156,370
<SHARES-COMMON-STOCK> 22,789,317
<SHARES-COMMON-PRIOR> 20,731,900
<ACCUMULATED-NII-CURRENT> 548,705
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 196,677
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,957,578
<NET-ASSETS> 273,859,330
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,161,858
<OTHER-INCOME> 0
<EXPENSES-NET> (1,811,935)
<NET-INVESTMENT-INCOME> 14,349,923
<REALIZED-GAINS-CURRENT> 1,156,378
<APPREC-INCREASE-CURRENT> (2,475,177)
<NET-CHANGE-FROM-OPS> 13,031,124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,073,629)
<DISTRIBUTIONS-OF-GAINS> (937,804)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,966,235
<NUMBER-OF-SHARES-REDEEMED> (2,503,773)
<SHARES-REINVESTED> 594,955
<NET-CHANGE-IN-ASSETS> 25,012,614
<ACCUMULATED-NII-PRIOR> 405,867
<ACCUMULATED-GAINS-PRIOR> (8,494)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,416,882
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,811,935
<AVERAGE-NET-ASSETS> 258,548,200
<PER-SHARE-NAV-BEGIN> 11.940
<PER-SHARE-NII> .653
<PER-SHARE-GAIN-APPREC> (.072)
<PER-SHARE-DIVIDEND> (.649)
<PER-SHARE-DISTRIBUTIONS> (.042)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.83
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 261,859,986
<INVESTMENTS-AT-VALUE> 274,817,564
<RECEIVABLES> 4,769,420
<ASSETS-OTHER> 147,623
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 279,734,607
<PAYABLE-FOR-SECURITIES> 4,711,321
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,163,956
<TOTAL-LIABILITIES> 5,875,277
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,156,370
<SHARES-COMMON-STOCK> 362,419
<SHARES-COMMON-PRIOR> 110,725
<ACCUMULATED-NII-CURRENT> 548,705
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 196,677
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,957,578
<NET-ASSETS> 273,859,330
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,161,858
<OTHER-INCOME> 0
<EXPENSES-NET> (1,811,935)
<NET-INVESTMENT-INCOME> 14,349,923
<REALIZED-GAINS-CURRENT> 1,156,378
<APPREC-INCREASE-CURRENT> (2,475,177)
<NET-CHANGE-FROM-OPS> 13,031,124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (133,456)
<DISTRIBUTIONS-OF-GAINS> (13,403)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 269,876
<NUMBER-OF-SHARES-REDEEMED> (27,585)
<SHARES-REINVESTED> 9,403
<NET-CHANGE-IN-ASSETS> 25,012,614
<ACCUMULATED-NII-PRIOR> 405,867
<ACCUMULATED-GAINS-PRIOR> (8,494)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,416,882
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,811,935
<AVERAGE-NET-ASSETS> 258,548,200
<PER-SHARE-NAV-BEGIN> 11.97
<PER-SHARE-NII> .582
<PER-SHARE-GAIN-APPREC> (.084)
<PER-SHARE-DIVIDEND> (.576)
<PER-SHARE-DISTRIBUTIONS> (.042)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.85
<EXPENSE-RATIO> 1.140
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 363,611,890
<INVESTMENTS-AT-VALUE> 385,452,643
<RECEIVABLES> 7,023,189
<ASSETS-OTHER> 268,045
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 392,743,877
<PAYABLE-FOR-SECURITIES> 206,902
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,434,238
<TOTAL-LIABILITIES> 1,641,140
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 373,063,607
<SHARES-COMMON-STOCK> 33,251,901
<SHARES-COMMON-PRIOR> 32,356,619
<ACCUMULATED-NII-CURRENT> 1,470,171
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,271,794)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,840,753
<NET-ASSETS> 391,102,737
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23,503,310
<OTHER-INCOME> 0
<EXPENSES-NET> (2,540,886)
<NET-INVESTMENT-INCOME> 20,962,424
<REALIZED-GAINS-CURRENT> (67,453)
<APPREC-INCREASE-CURRENT> (1,899,285)
<NET-CHANGE-FROM-OPS> 18,995,686
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,472,473)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,911,445
<NUMBER-OF-SHARES-REDEEMED> (4,024,495)
<SHARES-REINVESTED> 1,008,332
<NET-CHANGE-IN-ASSETS> 13,643,833
<ACCUMULATED-NII-PRIOR> 1,180,384
<ACCUMULATED-GAINS-PRIOR> (5,204,341)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,964,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,540,886
<AVERAGE-NET-ASSETS> 379,941,745
<PER-SHARE-NAV-BEGIN> 11.600
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> (0.055)
<PER-SHARE-DIVIDEND> (0.625)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.550
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 363,611,890
<INVESTMENTS-AT-VALUE> 385,452,643
<RECEIVABLES> 7,023,189
<ASSETS-OTHER> 268,045
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 392,743,877
<PAYABLE-FOR-SECURITIES> 206,902
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,434,238
<TOTAL-LIABILITIES> 1,641,140
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 373,063,607
<SHARES-COMMON-STOCK> 611,702
<SHARES-COMMON-PRIOR> 175,549
<ACCUMULATED-NII-CURRENT> 1,470,171
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,271,794)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,840,753
<NET-ASSETS> 391,102,737
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23,503,310
<OTHER-INCOME> 0
<EXPENSES-NET> (2,540,886)
<NET-INVESTMENT-INCOME> 20,962,424
<REALIZED-GAINS-CURRENT> (67,453)
<APPREC-INCREASE-CURRENT> (1,899,285)
<NET-CHANGE-FROM-OPS> 18,995,686
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (200,164)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 464,993
<NUMBER-OF-SHARES-REDEEMED> (42,568)
<SHARES-REINVESTED> 13,728
<NET-CHANGE-IN-ASSETS> 13,643,833
<ACCUMULATED-NII-PRIOR> 1,180,384
<ACCUMULATED-GAINS-PRIOR> (5,204,341)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,964,313
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,540,886
<AVERAGE-NET-ASSETS> 379,941,745
<PER-SHARE-NAV-BEGIN> 11.650
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> (0.042)
<PER-SHARE-DIVIDEND> (0.558)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.610
<EXPENSE-RATIO> 1.230
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 119,014,714
<INVESTMENTS-AT-VALUE> 125,882,777
<RECEIVABLES> 5,657,229
<ASSETS-OTHER> 98,195
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,638,201
<PAYABLE-FOR-SECURITIES> 4,015,834
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 270,359
<TOTAL-LIABILITIES> 4,286,193
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,085,694
<SHARES-COMMON-STOCK> 11,131,224
<SHARES-COMMON-PRIOR> 11,196,751
<ACCUMULATED-NII-CURRENT> 51,160
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 347,091
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,868,063
<NET-ASSETS> 127,352,008
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,239,586
<OTHER-INCOME> 0
<EXPENSES-NET> (962,609)
<NET-INVESTMENT-INCOME> 7,276,977
<REALIZED-GAINS-CURRENT> 2,502,380
<APPREC-INCREASE-CURRENT> (2,443,895)
<NET-CHANGE-FROM-OPS> 7,335,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,454,483)
<DISTRIBUTIONS-OF-GAINS> (2,155,163)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 891,121
<NUMBER-OF-SHARES-REDEEMED> (1,329,365)
<SHARES-REINVESTED> 372,717
<NET-CHANGE-IN-ASSETS> (2,429,099)
<ACCUMULATED-NII-PRIOR> 247,882
<ACCUMULATED-GAINS-PRIOR> 10,887
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 762,188
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 962,609
<AVERAGE-NET-ASSETS> 127,628,615
<PER-SHARE-NAV-BEGIN> 11.580
<PER-SHARE-NII> .655
<PER-SHARE-GAIN-APPREC> .006
<PER-SHARE-DIVIDEND> (.673)
<PER-SHARE-DISTRIBUTIONS> (.198)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.370
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 119,014,714
<INVESTMENTS-AT-VALUE> 125,882,777
<RECEIVABLES> 5,657,229
<ASSETS-OTHER> 98,195
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,638,201
<PAYABLE-FOR-SECURITIES> 4,015,834
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 270,359
<TOTAL-LIABILITIES> 4,286,193
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,085,694
<SHARES-COMMON-STOCK> 64,374
<SHARES-COMMON-PRIOR> 6,731
<ACCUMULATED-NII-CURRENT> 51,160
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 347,091
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,868,063
<NET-ASSETS> 127,352,008
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,239,586
<OTHER-INCOME> 0
<EXPENSES-NET> (962,609)
<NET-INVESTMENT-INCOME> 7,276,977
<REALIZED-GAINS-CURRENT> 2,502,380
<APPREC-INCREASE-CURRENT> (2,443,895)
<NET-CHANGE-FROM-OPS> 7,335,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,024)
<DISTRIBUTIONS-OF-GAINS> (11,013)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55,787
<NUMBER-OF-SHARES-REDEEMED> (521)
<SHARES-REINVESTED> 2,377
<NET-CHANGE-IN-ASSETS> (2,429,099)
<ACCUMULATED-NII-PRIOR> 247,882
<ACCUMULATED-GAINS-PRIOR> 10,887
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 762,188
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 962,609
<AVERAGE-NET-ASSETS> 127,628,615
<PER-SHARE-NAV-BEGIN> 11.680
<PER-SHARE-NII> .595
<PER-SHARE-GAIN-APPREC> .024
<PER-SHARE-DIVIDEND> (.611)
<PER-SHARE-DISTRIBUTIONS> (.198)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.490
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 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> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 273,976,029
<INVESTMENTS-AT-VALUE> 288,897,565
<RECEIVABLES> 5,324,789
<ASSETS-OTHER> 282,395
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 294,504,749
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 658,811
<TOTAL-LIABILITIES> 658,811
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 277,534,119
<SHARES-COMMON-STOCK> 24,653,916
<SHARES-COMMON-PRIOR> 23,164,535
<ACCUMULATED-NII-CURRENT> 533,631
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 856,652
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,921,536
<NET-ASSETS> 293,845,938
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,609,467
<OTHER-INCOME> 0
<EXPENSES-NET> (1,971,549)
<NET-INVESTMENT-INCOME> 15,637,918
<REALIZED-GAINS-CURRENT> 1,469,868
<APPREC-INCREASE-CURRENT> (2,766,723)
<NET-CHANGE-FROM-OPS> 14,341,063
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,478,276)
<DISTRIBUTIONS-OF-GAINS> (96,953)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,444,893
<NUMBER-OF-SHARES-REDEEMED> (2,557,004)
<SHARES-REINVESTED> 601,492
<NET-CHANGE-IN-ASSETS> 20,399,846
<ACCUMULATED-NII-PRIOR> 591,271
<ACCUMULATED-GAINS-PRIOR> (514,236)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,519,947
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,971,549
<AVERAGE-NET-ASSETS> 281,537,440
<PER-SHARE-NAV-BEGIN> 11.720
<PER-SHARE-NII> .645
<PER-SHARE-GAIN-APPREC> (.062)
<PER-SHARE-DIVIDEND> (.649)
<PER-SHARE-DISTRIBUTIONS> (.004)
<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 28, 1997 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> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 273,976,029
<INVESTMENTS-AT-VALUE> 288,897,565
<RECEIVABLES> 5,324,789
<ASSETS-OTHER> 282,395
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 294,504,749
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 658,811
<TOTAL-LIABILITIES> 658,811
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 277,534,119
<SHARES-COMMON-STOCK> 569,870
<SHARES-COMMON-PRIOR> 174,185
<ACCUMULATED-NII-CURRENT> 533,631
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 856,652
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,921,536
<NET-ASSETS> 293,845,938
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,609,467
<OTHER-INCOME> 0
<EXPENSES-NET> (1,971,549)
<NET-INVESTMENT-INCOME> 15,637,918
<REALIZED-GAINS-CURRENT> 1,469,868
<APPREC-INCREASE-CURRENT> (2,766,723)
<NET-CHANGE-FROM-OPS> 14,341,063
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (217,282)
<DISTRIBUTIONS-OF-GAINS> (2,027)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 408,327
<NUMBER-OF-SHARES-REDEEMED> (23,383)
<SHARES-REINVESTED> 10,741
<NET-CHANGE-IN-ASSETS> 20,399,846
<ACCUMULATED-NII-PRIOR> 591,271
<ACCUMULATED-GAINS-PRIOR> (514,236)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,519,947
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,971,549
<AVERAGE-NET-ASSETS> 281,537,440
<PER-SHARE-NAV-BEGIN> 11.770
<PER-SHARE-NII> .575
<PER-SHARE-GAIN-APPREC> (.050)
<PER-SHARE-DIVIDEND> (.581)
<PER-SHARE-DISTRIBUTIONS> (.004)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.710
<EXPENSE-RATIO> 1.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 185,249,086
<INVESTMENTS-AT-VALUE> 195,447,292
<RECEIVABLES> 3,661,802
<ASSETS-OTHER> 521,012
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 199,630,106
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 481,769
<TOTAL-LIABILITIES> 481,769
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 187,994,526
<SHARES-COMMON-STOCK> 16,495,571
<SHARES-COMMON-PRIOR> 15,856,631
<ACCUMULATED-NII-CURRENT> 278,329
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 677,276
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,198,206
<NET-ASSETS> 199,148,337
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,069,094
<OTHER-INCOME> 0
<EXPENSES-NET> (1,378,421)
<NET-INVESTMENT-INCOME> 10,690,673
<REALIZED-GAINS-CURRENT> 826,032
<APPREC-INCREASE-CURRENT> (664,763)
<NET-CHANGE-FROM-OPS> 10,851,942
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,601,182)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,942,732
<NUMBER-OF-SHARES-REDEEMED> (1,676,632)
<SHARES-REINVESTED> 372,840
<NET-CHANGE-IN-ASSETS> 11,505,523
<ACCUMULATED-NII-PRIOR> 375,254
<ACCUMULATED-GAINS-PRIOR> (148,756)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,079,285
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,378,421
<AVERAGE-NET-ASSETS> 190,629,360
<PER-SHARE-NAV-BEGIN> 11.730
<PER-SHARE-NII> .654
<PER-SHARE-GAIN-APPREC> .007
<PER-SHARE-DIVIDEND> (.661)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.730
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 185,249,086
<INVESTMENTS-AT-VALUE> 195,447,292
<RECEIVABLES> 3,661,802
<ASSETS-OTHER> 521,012
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 199,630,106
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 481,769
<TOTAL-LIABILITIES> 481,769
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 187,994,526
<SHARES-COMMON-STOCK> 482,597
<SHARES-COMMON-PRIOR> 141,273
<ACCUMULATED-NII-CURRENT> 278,329
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 677,276
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,198,206
<NET-ASSETS> 199,148,337
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,069,094
<OTHER-INCOME> 0
<EXPENSES-NET> (1,378,421)
<NET-INVESTMENT-INCOME> 10,690,673
<REALIZED-GAINS-CURRENT> 826,032
<APPREC-INCREASE-CURRENT> (664,763)
<NET-CHANGE-FROM-OPS> 10,851,942
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (186,416)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 355,918
<NUMBER-OF-SHARES-REDEEMED> (21,459)
<SHARES-REINVESTED> 6,865
<NET-CHANGE-IN-ASSETS> 11,505,523
<ACCUMULATED-NII-PRIOR> 375,254
<ACCUMULATED-GAINS-PRIOR> (148,756)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,079,285
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,378,421
<AVERAGE-NET-ASSETS> 190,629,360
<PER-SHARE-NAV-BEGIN> 11.770
<PER-SHARE-NII> .586
<PER-SHARE-GAIN-APPREC> .015
<PER-SHARE-DIVIDEND> (.591)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.780
<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 28, 1997 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> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,370,694,454
<INVESTMENTS-AT-VALUE> 1,453,483,244
<RECEIVABLES> 30,533,274
<ASSETS-OTHER> 1,035,967
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,485,052,485
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,409,846
<TOTAL-LIABILITIES> 3,409,846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,401,580,338
<SHARES-COMMON-STOCK> 125,815,973
<SHARES-COMMON-PRIOR> 115,813,580
<ACCUMULATED-NII-CURRENT> 1,660,453
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,386,987)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 82,788,790
<NET-ASSETS> 1,481,642,639
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 89,318,577
<OTHER-INCOME> 0
<EXPENSES-NET> (8,478,616)
<NET-INVESTMENT-INCOME> 80,839,961
<REALIZED-GAINS-CURRENT> (1,969,420)
<APPREC-INCREASE-CURRENT> (7,137,684)
<NET-CHANGE-FROM-OPS> 71,732,857
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 81,984,156
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23,001,817
<NUMBER-OF-SHARES-REDEEMED> (14,883,522)
<SHARES-REINVESTED> 1,884,098
<NET-CHANGE-IN-ASSETS> 120,458,312
<ACCUMULATED-NII-PRIOR> 3,602,270
<ACCUMULATED-GAINS-PRIOR> (2,417,567)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,567,507
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,478,616
<AVERAGE-NET-ASSETS> 1,400,597,124
<PER-SHARE-NAV-BEGIN> 11.690
<PER-SHARE-NII> .667
<PER-SHARE-GAIN-APPREC> (.082)
<PER-SHARE-DIVIDEND> (.685)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.590
<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 28, 1997 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> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 1,370,694,454
<INVESTMENTS-AT-VALUE> 1,453,483,244
<RECEIVABLES> 30,533,274
<ASSETS-OTHER> 1,035,967
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,485,052,485
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,409,846
<TOTAL-LIABILITIES> 3,409,846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,401,580,338
<SHARES-COMMON-STOCK> 2,018,521
<SHARES-COMMON-PRIOR> 650,212
<ACCUMULATED-NII-CURRENT> 1,660,453
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,386,987)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 82,788,790
<NET-ASSETS> 1,481,642,639
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 89,318,577
<OTHER-INCOME> 0
<EXPENSES-NET> (8,478,616)
<NET-INVESTMENT-INCOME> 80,839,961
<REALIZED-GAINS-CURRENT> (1,969,420)
<APPREC-INCREASE-CURRENT> (7,137,684)
<NET-CHANGE-FROM-OPS> 71,732,857
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 797,622
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,489,791
<NUMBER-OF-SHARES-REDEEMED> (160,270)
<SHARES-REINVESTED> 38,788
<NET-CHANGE-IN-ASSETS> 120,458,312
<ACCUMULATED-NII-PRIOR> 3,602,270
<ACCUMULATED-GAINS-PRIOR> (2,417,567)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,567,507
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,478,616
<AVERAGE-NET-ASSETS> 1,400,597,124
<PER-SHARE-NAV-BEGIN> 11.760
<PER-SHARE-NII> .602
<PER-SHARE-GAIN-APPREC> (.074)
<PER-SHARE-DIVIDEND> (.618)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.670
<EXPENSE-RATIO> 1.170
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 171
<NAME> FRANKLIN INDIANA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 47,475,787
<INVESTMENTS-AT-VALUE> 50,415,458
<RECEIVABLES> 625,488
<ASSETS-OTHER> 203,551
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51,244,497
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 107,180
<TOTAL-LIABILITIES> 107,180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,502,157
<SHARES-COMMON-STOCK> 4,344,574
<SHARES-COMMON-PRIOR> 4,164,111
<ACCUMULATED-NII-CURRENT> 116,031
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (420,542)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,939,671
<NET-ASSETS> 51,137,317
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,241,085
<OTHER-INCOME> 0
<EXPENSES-NET> (408,615)
<NET-INVESTMENT-INCOME> 2,832,470
<REALIZED-GAINS-CURRENT> 451,723
<APPREC-INCREASE-CURRENT> (363,352)
<NET-CHANGE-FROM-OPS> 2,920,841
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,822,030)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 534,226
<NUMBER-OF-SHARES-REDEEMED> (481,802)
<SHARES-REINVESTED> 128,039
<NET-CHANGE-IN-ASSETS> 2,188,041
<ACCUMULATED-NII-PRIOR> 105,591
<ACCUMULATED-GAINS-PRIOR> (872,264)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 311,799
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 408,615
<AVERAGE-NET-ASSETS> 49,811,746
<PER-SHARE-NAV-BEGIN> 11.760
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> 0.011
<PER-SHARE-DIVIDEND> (0.661)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.770
<EXPENSE-RATIO> .820
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS FINANCIAL SUMMARY INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 107,342,441
<INVESTMENTS-AT-VALUE> 114,232,728
<RECEIVABLES> 2,103,903
<ASSETS-OTHER> 107,196
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 116,443,827
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 458,553
<TOTAL-LIABILITIES> 458,553
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111,254,474
<SHARES-COMMON-STOCK> 9,984,603
<SHARES-COMMON-PRIOR> 9,492,783
<ACCUMULATED-NII-CURRENT> 294,774
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,454,261)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,890,287
<NET-ASSETS> 115,985,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,383,958
<OTHER-INCOME> 0
<EXPENSES-NET> (877,317)
<NET-INVESTMENT-INCOME> 6,506,641
<REALIZED-GAINS-CURRENT> 483,603
<APPREC-INCREASE-CURRENT> (403,628)
<NET-CHANGE-FROM-OPS> 6,586,616
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,387,908)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,474,073
<NUMBER-OF-SHARES-REDEEMED> (1,216,948)
<SHARES-REINVESTED> 234,695
<NET-CHANGE-IN-ASSETS> 7,086,110
<ACCUMULATED-NII-PRIOR> 305,059
<ACCUMULATED-GAINS-PRIOR> (2,937,864)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 692,158
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 877,317
<AVERAGE-NET-ASSETS> 113,090,041
<PER-SHARE-NAV-BEGIN> 11.32
<PER-SHARE-NII> 0.646
<PER-SHARE-GAIN-APPREC> 0.003
<PER-SHARE-DIVIDEND> (0.649)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.32
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS FINANCIAL SUMMARY INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 107,342,441
<INVESTMENTS-AT-VALUE> 114,232,728
<RECEIVABLES> 2,103,903
<ASSETS-OTHER> 107,196
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 116,443,827
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 458,553
<TOTAL-LIABILITIES> 458,553
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111,254,474
<SHARES-COMMON-STOCK> 264,131
<SHARES-COMMON-PRIOR> 126,471
<ACCUMULATED-NII-CURRENT> 294,774
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,454,261)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,890,287
<NET-ASSETS> 115,985,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,383,958
<OTHER-INCOME> 0
<EXPENSES-NET> (877,317)
<NET-INVESTMENT-INCOME> 6,506,641
<REALIZED-GAINS-CURRENT> 483,603
<APPREC-INCREASE-CURRENT> (403,628)
<NET-CHANGE-FROM-OPS> 6,586,616
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (129,018)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,161
<NUMBER-OF-SHARES-REDEEMED> (61,281)
<SHARES-REINVESTED> 5,780
<NET-CHANGE-IN-ASSETS> 7,086,110
<ACCUMULATED-NII-PRIOR> 305,059
<ACCUMULATED-GAINS-PRIOR> (2,937,864)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 692,158
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 877,317
<AVERAGE-NET-ASSETS> 113,090,041
<PER-SHARE-NAV-BEGIN> 11.37
<PER-SHARE-NII> 0.583
<PER-SHARE-GAIN-APPREC> (0.004)
<PER-SHARE-DIVIDEND> (0.579)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.37
<EXPENSE-RATIO> 1.33
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 257,914,999
<INVESTMENTS-AT-VALUE> 270,793,345
<RECEIVABLES> 4,718,203
<ASSETS-OTHER> 600,149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 276,111,697
<PAYABLE-FOR-SECURITIES> 4,995,163
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 531,057
<TOTAL-LIABILITIES> 5,526,220
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,687,137
<SHARES-COMMON-STOCK> 22,245,981
<SHARES-COMMON-PRIOR> 21,030,672
<ACCUMULATED-NII-CURRENT> 137,710
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,117,716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,878,346
<NET-ASSETS> 270,585,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,864,070
<OTHER-INCOME> 0
<EXPENSES-NET> (1,827,248)
<NET-INVESTMENT-INCOME> 14,036,822
<REALIZED-GAINS-CURRENT> (187,812)
<APPREC-INCREASE-CURRENT> (124,286)
<NET-CHANGE-FROM-OPS> 13,724,724
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,584,397)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,552,504
<NUMBER-OF-SHARES-REDEEMED> (2,910,471)
<SHARES-REINVESTED> 573,276
<NET-CHANGE-IN-ASSETS> 21,123,703
<ACCUMULATED-NII-PRIOR> (30,217)
<ACCUMULATED-GAINS-PRIOR> (2,929,904)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,410,760
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,827,248
<AVERAGE-NET-ASSETS> 257,311,513
<PER-SHARE-NAV-BEGIN> 11.750
<PER-SHARE-NII> .637
<PER-SHARE-GAIN-APPREC> (.027)
<PER-SHARE-DIVIDEND> (.630)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.730
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 257,914,999
<INVESTMENTS-AT-VALUE> 270,793,345
<RECEIVABLES> 4,718,203
<ASSETS-OTHER> 600,149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 276,111,697
<PAYABLE-FOR-SECURITIES> 4,995,163
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 531,057
<TOTAL-LIABILITIES> 5,526,220
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 260,687,137
<SHARES-COMMON-STOCK> 814,708
<SHARES-COMMON-PRIOR> 205,964
<ACCUMULATED-NII-CURRENT> 137,710
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,117,716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,878,346
<NET-ASSETS> 270,585,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,864,070
<OTHER-INCOME> 0
<EXPENSES-NET> (1,827,248)
<NET-INVESTMENT-INCOME> 14,036,822
<REALIZED-GAINS-CURRENT> (187,812)
<APPREC-INCREASE-CURRENT> (124,286)
<NET-CHANGE-FROM-OPS> 13,724,724
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (284,498)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 616,676
<NUMBER-OF-SHARES-REDEEMED> (22,519)
<SHARES-REINVESTED> 14,587
<NET-CHANGE-IN-ASSETS> 21,123,703
<ACCUMULATED-NII-PRIOR> (30,217)
<ACCUMULATED-GAINS-PRIOR> (2,929,904)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,410,760
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,827,248
<AVERAGE-NET-ASSETS> 257,311,513
<PER-SHARE-NAV-BEGIN> 11.800
<PER-SHARE-NII> .569
<PER-SHARE-GAIN-APPREC> (.017)
<PER-SHARE-DIVIDEND> (.562)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.790
<EXPENSE-RATIO> 1.260
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 709,492,712
<INVESTMENTS-AT-VALUE> 751,330,962
<RECEIVABLES> 9,858,399
<ASSETS-OTHER> 267,539
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 761,456,900
<PAYABLE-FOR-SECURITIES> 1,727,542
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,908,816
<TOTAL-LIABILITIES> 3,636,358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 715,037,949
<SHARES-COMMON-STOCK> 66,912,442
<SHARES-COMMON-PRIOR> 66,223,810
<ACCUMULATED-NII-CURRENT> 163,313
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 781,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,838,250
<NET-ASSETS> 757,820,542
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,564,625
<OTHER-INCOME> 0
<EXPENSES-NET> (4,667,214)
<NET-INVESTMENT-INCOME> 41,897,411
<REALIZED-GAINS-CURRENT> 2,134,164
<APPREC-INCREASE-CURRENT> (4,443,512)
<NET-CHANGE-FROM-OPS> 39,588,063
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42,443,851)
<DISTRIBUTIONS-OF-GAINS> (3,059,354)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,998,298
<NUMBER-OF-SHARES-REDEEMED> (8,930,597)
<SHARES-REINVESTED> 1,620,931
<NET-CHANGE-IN-ASSETS> 5,130,842
<ACCUMULATED-NII-PRIOR> 892,152
<ACCUMULATED-GAINS-PRIOR> 1,722,517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,627,685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,667,214
<AVERAGE-NET-ASSETS> 749,544,268
<PER-SHARE-NAV-BEGIN> 11.340
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> (.038)
<PER-SHARE-DIVIDEND> (.636)
<PER-SHARE-DISTRIBUTIONS> (.046)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.240
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 709,492,712
<INVESTMENTS-AT-VALUE> 751,330,962
<RECEIVABLES> 9,858,399
<ASSETS-OTHER> 267,539
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 761,456,900
<PAYABLE-FOR-SECURITIES> 1,727,542
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,908,816
<TOTAL-LIABILITIES> 3,636,358
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 715,037,949
<SHARES-COMMON-STOCK> 485,678
<SHARES-COMMON-PRIOR> 166,263
<ACCUMULATED-NII-CURRENT> 163,313
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 781,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,838,250
<NET-ASSETS> 757,820,542
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,564,625
<OTHER-INCOME> 0
<EXPENSES-NET> (4,667,214)
<NET-INVESTMENT-INCOME> 41,897,411
<REALIZED-GAINS-CURRENT> 2,134,164
<APPREC-INCREASE-CURRENT> (4,443,512)
<NET-CHANGE-FROM-OPS> 39,588,063
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (182,399)
<DISTRIBUTIONS-OF-GAINS> (16,297)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 376,534
<NUMBER-OF-SHARES-REDEEMED> (68,188)
<SHARES-REINVESTED> 11,069
<NET-CHANGE-IN-ASSETS> 5,130,842
<ACCUMULATED-NII-PRIOR> 892,152
<ACCUMULATED-GAINS-PRIOR> 1,722,517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,627,685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,667,214
<AVERAGE-NET-ASSETS> 749,544,268
<PER-SHARE-NAV-BEGIN> 11.380
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> (.033)
<PER-SHARE-DIVIDEND> (.571)
<PER-SHARE-DISTRIBUTIONS> (.046)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.300
<EXPENSE-RATIO> 1.190
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 549,037,616
<INVESTMENTS-AT-VALUE> 578,931,965
<RECEIVABLES> 9,831,182
<ASSETS-OTHER> 200,599
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 588,963,746
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,177,281
<TOTAL-LIABILITIES> 1,177,281
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 560,158,408
<SHARES-COMMON-STOCK> 49,487,969
<SHARES-COMMON-PRIOR> 48,364,863
<ACCUMULATED-NII-CURRENT> 1,032,211
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,298,503)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,894,349
<NET-ASSETS> 587,786,465
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35,570,143
<OTHER-INCOME> 0
<EXPENSES-NET> (3,746,963)
<NET-INVESTMENT-INCOME> 31,823,180
<REALIZED-GAINS-CURRENT> 2,380,405
<APPREC-INCREASE-CURRENT> (5,332,217)
<NET-CHANGE-FROM-OPS> 28,871,368
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (31,578,177)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,265,119
<NUMBER-OF-SHARES-REDEEMED> (6,530,752)
<SHARES-REINVESTED> 1,388,739
<NET-CHANGE-IN-ASSETS> 18,381,068
<ACCUMULATED-NII-PRIOR> 1,200,415
<ACCUMULATED-GAINS-PRIOR> (5,678,908)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,827,318
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,746,963
<AVERAGE-NET-ASSETS> 572,479,584
<PER-SHARE-NAV-BEGIN> 11.680
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> (0.063)
<PER-SHARE-DIVIDEND> (0.647)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.610
<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 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 549,037,616
<INVESTMENTS-AT-VALUE> 578,931,965
<RECEIVABLES> 9,831,182
<ASSETS-OTHER> 200,599
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 588,963,746
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,177,281
<TOTAL-LIABILITIES> 1,177,281
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 560,158,408
<SHARES-COMMON-STOCK> 1,123,282
<SHARES-COMMON-PRIOR> 387,446
<ACCUMULATED-NII-CURRENT> 1,032,211
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,298,503)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,894,349
<NET-ASSETS> 587,786,465
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 35,570,143
<OTHER-INCOME> 0
<EXPENSES-NET> (3,746,963)
<NET-INVESTMENT-INCOME> 31,823,180
<REALIZED-GAINS-CURRENT> 2,380,405
<APPREC-INCREASE-CURRENT> (5,332,217)
<NET-CHANGE-FROM-OPS> 28,871,368
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (413,207)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 823,396
<NUMBER-OF-SHARES-REDEEMED> (112,665)
<SHARES-REINVESTED> 25,105
<NET-CHANGE-IN-ASSETS> 18,381,068
<ACCUMULATED-NII-PRIOR> 1,200,415
<ACCUMULATED-GAINS-PRIOR> (5,678,908)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,827,318
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,746,963
<AVERAGE-NET-ASSETS> 572,479,584
<PER-SHARE-NAV-BEGIN> 11.720
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> (0.053)
<PER-SHARE-DIVIDEND> (0.577)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.660
<EXPENSE-RATIO> 1.210
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 172,431,695
<INVESTMENTS-AT-VALUE> 184,121,420
<RECEIVABLES> 3,150,919
<ASSETS-OTHER> 910,857
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 188,183,196
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385,700
<TOTAL-LIABILITIES> 385,700
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182,608,192
<SHARES-COMMON-STOCK> 16,811,298
<SHARES-COMMON-PRIOR> 15,247,577
<ACCUMULATED-NII-CURRENT> 19,798
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,520,219)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,689,725
<NET-ASSETS> 187,797,496
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,209,703
<OTHER-INCOME> 0
<EXPENSES-NET> (1,294,352)
<NET-INVESTMENT-INCOME> 9,915,351
<REALIZED-GAINS-CURRENT> (367,976)
<APPREC-INCREASE-CURRENT> 244,537
<NET-CHANGE-FROM-OPS> 9,791,912
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,979,953)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,013,488
<NUMBER-OF-SHARES-REDEEMED> (1,853,538)
<SHARES-REINVESTED> 403,771
<NET-CHANGE-IN-ASSETS> 19,096,719
<ACCUMULATED-NII-PRIOR> 234,517
<ACCUMULATED-GAINS-PRIOR> (6,152,243)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,012,114
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,294,352
<AVERAGE-NET-ASSETS> 176,735,248
<PER-SHARE-NAV-BEGIN> 10.96
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> (.025)
<PER-SHARE-DIVIDEND> (.625)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.92
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 172,431,695
<INVESTMENTS-AT-VALUE> 184,121,420
<RECEIVABLES> 3,150,919
<ASSETS-OTHER> 910,857
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 188,183,196
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385,700
<TOTAL-LIABILITIES> 385,700
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182,608,192
<SHARES-COMMON-STOCK> 379,133
<SHARES-COMMON-PRIOR> 150,925
<ACCUMULATED-NII-CURRENT> 19,798
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,520,219)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,689,725
<NET-ASSETS> 187,797,496
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,209,703
<OTHER-INCOME> 0
<EXPENSES-NET> (1,294,352)
<NET-INVESTMENT-INCOME> 9,915,351
<REALIZED-GAINS-CURRENT> (367,976)
<APPREC-INCREASE-CURRENT> 244,537
<NET-CHANGE-FROM-OPS> 9,791,912
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (150,117)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231,440
<NUMBER-OF-SHARES-REDEEMED> (12,392)
<SHARES-REINVESTED> 9,160
<NET-CHANGE-IN-ASSETS> 19,096,719
<ACCUMULATED-NII-PRIOR> 234,517
<ACCUMULATED-GAINS-PRIOR> (6,152,243)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,012,114
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,294,352
<AVERAGE-NET-ASSETS> 176,735,248
<PER-SHARE-NAV-BEGIN> 10.97
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> (.066)
<PER-SHARE-DIVIDEND> (.564)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.94
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 178,094,312
<INVESTMENTS-AT-VALUE> 187,077,172
<RECEIVABLES> 3,822,698
<ASSETS-OTHER> 331,652
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191,231,522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 912,724
<TOTAL-LIABILITIES> 912,724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 181,548,075
<SHARES-COMMON-STOCK> 16,347,421
<SHARES-COMMON-PRIOR> 15,386,759
<ACCUMULATED-NII-CURRENT> 42,905
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (255,042)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,982,860
<NET-ASSETS> 190,318,798
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,150,479
<OTHER-INCOME> 0
<EXPENSES-NET> (1,345,029)
<NET-INVESTMENT-INCOME> 9,805,450
<REALIZED-GAINS-CURRENT> 1,025,103
<APPREC-INCREASE-CURRENT> (1,388,666)
<NET-CHANGE-FROM-OPS> 9,441,887
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,897,629)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,604,160
<NUMBER-OF-SHARES-REDEEMED> (2,087,746)
<SHARES-REINVESTED> 444,248
<NET-CHANGE-IN-ASSETS> 14,327,560
<ACCUMULATED-NII-PRIOR> 271,585
<ACCUMULATED-GAINS-PRIOR> (1,280,145)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,033,178
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,345,029
<AVERAGE-NET-ASSETS> 181,202,074
<PER-SHARE-NAV-BEGIN> 11.380
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> (.035)
<PER-SHARE-DIVIDEND> (.625)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.330
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 178,094,312
<INVESTMENTS-AT-VALUE> 187,077,172
<RECEIVABLES> 3,822,698
<ASSETS-OTHER> 331,652
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191,231,522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 912,724
<TOTAL-LIABILITIES> 912,724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 181,548,075
<SHARES-COMMON-STOCK> 445,910
<SHARES-COMMON-PRIOR> 79,853
<ACCUMULATED-NII-CURRENT> 42,905
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (255,042)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,982,860
<NET-ASSETS> 190,318,798
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,150,479
<OTHER-INCOME> 0
<EXPENSES-NET> (1,345,029)
<NET-INVESTMENT-INCOME> 9,805,450
<REALIZED-GAINS-CURRENT> 1,025,103
<APPREC-INCREASE-CURRENT> (1,388,666)
<NET-CHANGE-FROM-OPS> 9,441,887
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (136,501)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 394,873
<NUMBER-OF-SHARES-REDEEMED> (36,209)
<SHARES-REINVESTED> 7,393
<NET-CHANGE-IN-ASSETS> 14,327,560
<ACCUMULATED-NII-PRIOR> 271,585
<ACCUMULATED-GAINS-PRIOR> (1,280,145)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,033,178
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,345,029
<AVERAGE-NET-ASSETS> 181,202,074
<PER-SHARE-NAV-BEGIN> 11.440
<PER-SHARE-NII> .549
<PER-SHARE-GAIN-APPREC> (.032)
<PER-SHARE-DIVIDEND> (.557)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.400
<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 28, 1997 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-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 42,245,271
<INVESTMENTS-AT-VALUE> 44,115,385
<RECEIVABLES> 2,265,583
<ASSETS-OTHER> 36,769
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,417,737
<PAYABLE-FOR-SECURITIES> 1,999,018
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 130,055
<TOTAL-LIABILITIES> 2,129,073
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,534,412
<SHARES-COMMON-STOCK> 4,006,855
<SHARES-COMMON-PRIOR> 3,532,880
<ACCUMULATED-NII-CURRENT> 29,569
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,145,431)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,870,114
<NET-ASSETS> 44,288,664
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,476,586
<OTHER-INCOME> 0
<EXPENSES-NET> (140,058)
<NET-INVESTMENT-INCOME> 2,336,528
<REALIZED-GAINS-CURRENT> (266,464)
<APPREC-INCREASE-CURRENT> 403,814
<NET-CHANGE-FROM-OPS> 2,473,878
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,331,502)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 890,801
<NUMBER-OF-SHARES-REDEEMED> (517,693)
<SHARES-REINVESTED> 100,867
<NET-CHANGE-IN-ASSETS> 5,297,540
<ACCUMULATED-NII-PRIOR> 24,543
<ACCUMULATED-GAINS-PRIOR> (878,967)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 260,610
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 334,413
<AVERAGE-NET-ASSETS> 41,489,784
<PER-SHARE-NAV-BEGIN> 11.040
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> .012
<PER-SHARE-DIVIDEND> (.612)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.050
<EXPENSE-RATIO> .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 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 25
<NAME> FRANKLIN FED. INTERMED. TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 99,799,239
<INVESTMENTS-AT-VALUE> 102,717,457
<RECEIVABLES> 1,960,502
<ASSETS-OTHER> 273,647
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 104,951,606
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 236,436
<TOTAL-LIABILITIES> 236,436
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 102,697,531
<SHARES-COMMON-STOCK> 9,571,206
<SHARES-COMMON-PRIOR> 7,848,594
<ACCUMULATED-NII-CURRENT> 265,520
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,166,099)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,918,218
<NET-ASSETS> 104,715,170
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,446,523
<OTHER-INCOME> 0
<EXPENSES-NET> (632,512)
<NET-INVESTMENT-INCOME> 4,814,011
<REALIZED-GAINS-CURRENT> (99,478)
<APPREC-INCREASE-CURRENT> 157,409
<NET-CHANGE-FROM-OPS> 4,871,942
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,748,392)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 47,044,282
<NUMBER-OF-SHARES-REDEEMED> (31,223,207)
<SHARES-REINVESTED> 2,803,060
<NET-CHANGE-IN-ASSETS> 18,624,135
<ACCUMULATED-NII-PRIOR> 199,901
<ACCUMULATED-GAINS-PRIOR> (1,066,621)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 586,462
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 780,131
<AVERAGE-NET-ASSETS> 93,347,990
<PER-SHARE-NAV-BEGIN> 10.950
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> (0.007)
<PER-SHARE-DIVIDEND> (0.553)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.940
<EXPENSE-RATIO> 0.680
<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 28, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 26
<NAME> FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 37,568,563
<INVESTMENTS-AT-VALUE> 38,978,654
<RECEIVABLES> 520,842
<ASSETS-OTHER> 265,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,764,781
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,653
<TOTAL-LIABILITIES> 71,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,628,478
<SHARES-COMMON-STOCK> 3,831,399
<SHARES-COMMON-PRIOR> 3,688,139
<ACCUMULATED-NII-CURRENT> 87,718
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (433,159)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,410,091
<NET-ASSETS> 39,693,128
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,164,362
<OTHER-INCOME> 0
<EXPENSES-NET> (96,642)
<NET-INVESTMENT-INCOME> 2,067,720
<REALIZED-GAINS-CURRENT> (5,619)
<APPREC-INCREASE-CURRENT> (10,776)
<NET-CHANGE-FROM-OPS> 2,051,325
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,055,948)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,063,087
<NUMBER-OF-SHARES-REDEEMED> (1,004,299)
<SHARES-REINVESTED> 84,472
<NET-CHANGE-IN-ASSETS> 1,494,332
<ACCUMULATED-NII-PRIOR> 75,946
<ACCUMULATED-GAINS-PRIOR> (427,540)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238,269
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 325,702
<AVERAGE-NET-ASSETS> 37,972,511
<PER-SHARE-NAV-BEGIN> 10.360
<PER-SHARE-NII> .550
<PER-SHARE-GAIN-APPREC> .003
<PER-SHARE-DIVIDEND> (.553)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.360
<EXPENSE-RATIO> .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 28, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 27
<NAME> FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 73,817,016
<INVESTMENTS-AT-VALUE> 75,845,228
<RECEIVABLES> 2,716,772
<ASSETS-OTHER> 128,956
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 78,690,956
<PAYABLE-FOR-SECURITIES> 1,381,482
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132,575
<TOTAL-LIABILITIES> 1,514,057
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 76,507,553
<SHARES-COMMON-STOCK> 7,728,681
<SHARES-COMMON-PRIOR> 6,942,043
<ACCUMULATED-NII-CURRENT> 50,649
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,409,515)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,028,212
<NET-ASSETS> 77,176,899
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,078,027
<OTHER-INCOME> 0
<EXPENSES-NET> (248,416)
<NET-INVESTMENT-INCOME> 3,829,611
<REALIZED-GAINS-CURRENT> (119,240)
<APPREC-INCREASE-CURRENT> (44,777)
<NET-CHANGE-FROM-OPS> 3,665,594
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,811,701)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,159,414
<NUMBER-OF-SHARES-REDEEMED> (1,507,044)
<SHARES-REINVESTED> 134,268
<NET-CHANGE-IN-ASSETS> 7,593,546
<ACCUMULATED-NII-PRIOR> 32,739
<ACCUMULATED-GAINS-PRIOR> (1,290,275)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 447,534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 569,339
<AVERAGE-NET-ASSETS> 71,443,006
<PER-SHARE-NAV-BEGIN> 10.020
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> (.032)
<PER-SHARE-DIVIDEND> (.528)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.990
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
