As filed with the Securities and Exchange Commission on April 30, 1998
File Nos.
02-94222
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. 25 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 (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 (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on July 1, 1998 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund - Class I
Franklin Insured Tax-Free Income Fund - Class II
Franklin Massachusetts Insured Tax-Free Income Fund - Class I
Franklin Massachusetts Insured Tax-Free Income Fund - Class II
Franklin Michigan Insured Tax-Free Income Fund - Class I
Franklin Michigan Insured Tax-Free Income Fund - Class II
Franklin Minnesota Insured Tax-Free Income Fund - Class I
Franklin Minnesota Insured Tax-Free Income Fund - Class II
Franklin Ohio Insured Tax-Free Income Fund - Class I
Franklin Ohio Insured Tax-Free Income Fund - Class II
Franklin Alabama Tax-Free Income Fund - Class I
Franklin Alabama Tax-Free Income Fund - Class II
Franklin Florida Tax-Free Income Fund - Class I
Franklin Florida Tax-Free Income Fund - Class II
Franklin Georgia Tax-Free Income Fund - Class I
Franklin Georgia Tax-Free Income Fund - Class II
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund - Class I
Franklin Louisiana Tax-Free Income Fund - Class II
Franklin Maryland Tax-Free Income Fund - Class I
Franklin Maryland Tax-Free Income Fund - Class II
Franklin Missouri Tax-Free Income Fund - Class I
Franklin Missouri Tax-Free Income Fund - Class II
Franklin North Carolina Tax-Free Income Fund - Class I
Franklin North Carolina Tax-Free Income Fund - Class II
Franklin Texas Tax-Free Income Fund - Class I
Franklin Texas Tax-Free Income Fund - Class II
Franklin Virginia Tax-Free Income Fund - Class I
Franklin Virginia Tax-Free Income Fund - Class II
Franklin Arizona Tax-Free Income Fund - Class I
Franklin Arizona Tax-Free Income Fund - Class II
Franklin Colorado Tax-Free Income Fund - Class I
Franklin Colorado Tax-Free Income Fund - Class II
Franklin Connecticut Tax-Free Income Fund - Class I
Franklin Connecticut Tax-Free Income Fund - Class II
Franklin High Yield Tax-Free Income Fund - Class I
Franklin High Yield Tax-Free Income Fund - Class II
Franklin Indiana Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund - Class I
Franklin New Jersey Tax-Free Income Fund - Class II
Franklin Oregon Tax-Free Income Fund - Class I
Franklin Oregon Tax-Free Income Fund - Class II
Franklin Pennsylvania Tax-Free Income Fund - Class I
Franklin Pennsylvania Tax-Free Income Fund - Class II
Franklin Puerto Rico Tax-Free Income Fund - Class I
Franklin Puerto Rico Tax-Free Income Fund - Class II
Franklin Federal Intermediate-Term Tax-Free Income Fund
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE 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
Franklin Ohio Insured Tax-Free Income Fund
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information Do the Funds Measure
Performance?"
4. General Description "How Is the Trust Organized?";
of Registrant "How Do the Funds Invest Their
Assets?"; "What Are the Risks of
Investing in the Funds?"
5. Management of the "Who Manages the Funds?"
Fund
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Funds?"; "How Taxation
Affects the Funds and Their
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for
Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE 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
Franklin Virginia Tax-Free Income Fund
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information Do the Funds Measure Performance?"
4. General Description "How Is the Trust Organized?";
of Registrant "How Do the Funds Invest Their
Assets?"; "What Are the Risks of
Investing in the Funds?"
5. Management of the "Who Manages the Funds?"
Fund
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Funds?"; "How Taxation
Affects the Funds and Their
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin High Yield 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
Franklin Federal Intermediate-Term Tax-Free Income Fund
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information Do the Funds Measure
Performance?"
4. General Description "How Is the Trust Organized?";
of Registrant "How Do the Funds Invest Their
Assets?"; "What Are the Risks of
Investing in the Funds?"
5. Management of the "Who Manages the Funds?"
Fund
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Funds?"; "How Taxation
Affects the Funds and Their
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account";
"Useful Terms and Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
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
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 Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How Do the Funds Invest Their
and Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees";
Principal Holders "Investment Management and
of Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Funds'
Underwriter"
17. Brokerage Allocation "How Do the Funds Buy
and Other Practices Securities for Their Portfolios?"
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How Are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Funds' Underwriter"
22. Calculation of "How Do the Funds Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
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
Franklin Virginia Tax-Free Income Fund
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How Do the Funds Invest Their
and Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Funds'
Underwriter"
17. Brokerage Allocation "How Do the Funds Buy
and Other Practices Securities for Their Portfolios?"
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How Are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Funds' Underwriter"
22. Calculation of "How Do the Funds Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin High Yield 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
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 Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How Do the Funds Invest Their
and Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees";
Principal Holders "Investment Management and
of Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Funds'
Underwriter"
17. Brokerage Allocation and "How Do the Funds Buy
Other Practices Securities for Their Portfolios?"
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How Are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Funds' Underwriter"
22. Calculation of "How Do the Funds Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN TAX-FREE TRUST
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
Franklin Ohio Insured Tax-Free Income Fund
JULY 1, 1998
INVESTMENT STRATEGY: TAX-FREE INCOME
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how each fund invests and the
services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated July 1, 1998, which we
may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE 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, 1998
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 FUNDS
Expense Summary..........................................
Financial Highlights.....................................
How Do the Funds Invest Their Assets?....................
What Are the Risks of Investing in the Funds?............
Who Manages the Funds?...................................
How Do the Funds Measure Performance?....................
How Taxation Affects the Funds and Their Shareholders....
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Funds?.......
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a fund.
It is based on the historical expenses of each fund for the fiscal year ended
February 28, 1998. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
------------------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
(as a percentage of
Offering Price)
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 NONE NONE $5.00* NONE NONE NONE NONE
(per transaction)
CLASS II
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge - - 1.99% 1.99% 1.99% 1.99% 1.99%
(as a percentage
of Offering Price)
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 - - $5.00* NONE NONE NONE NONE
(per transaction)
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.63%** 0.63%** 0.47% 0.52% 0.47% 0.50% 0.49%
Rule 12b-1 Fees*** 0.10% 0.10% 0.08% 0.08% 0.08% 0.08% 0.09%
Other Expenses 0.09% 0.07% 0.06% 0.08% 0.08% 0.07% 0.06%
------------------------------------------------------------------------------------------
Total Fund Operating 0.82%** 0.80%** 0.61% 0.68% 0.63% 0.65% 0.64%
==========================================================================================
Expenses
CLASS II
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees - - 0.47% 0.52% 0.47% 0.50% 0.49%
Rule 12b-1 Fees*** - - 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses - - 0.06% 0.08% 0.08% 0.07% 0.06%
------------------------------------------------------------------------------------------
Total Fund Operating - - 1.18% 1.25% 1.20% 1.22% 1.20%
==========================================================================================
Expenses
</TABLE>
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 a fund.
<TABLE>
<CAPTION>
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
----------------------------------------------------------------------------------------
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year**** $51 $50 $48 $49 $49 $49 $49
3 Years $68 $67 $61 $63 $62 $62 $62
5 Years $86 $85 $75 $79 $76 $77 $77
10 Years $140 $137 $115 $124 $118 $120 $119
CLASS II
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year - - $32 $32 $32 $32 $32
3 Years - - $47 $49 $48 $48 $48
5 Years - - $74 $78 $75 $76 $75
10 Years - - $152 $160 $154 $156 $154
</TABLE>
For the same Class II investment, you would pay projected expenses of $22 for
the Insured, Michigan, Minnesota and Ohio funds, and $23 for the Massachusetts
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. Each
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.
+++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? - Choosing a Share Class."
++++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 you would pay is
the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
*$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 0.11% for the Arizona Fund and
0.18% for the Florida Fund. Total operating expenses were 0.30% 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 each fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the funds' 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, 1998. The Annual Report to Shareholders also includes
more information about each fund's performance. For a free copy, please call
Fund Information.
<TABLE>
<CAPTION>
ARIZONA FUND
YEAR ENDED FEB. 28 1998 1997 1996 1995 19941
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.36 $10.36 $ 9.80 $10.28 $10.00
-------------------------------------------
Income from investment operations:
Net investment income .54 .55 .55 .55 .34
Net realized and unrealized gains (losses) .42 - .57 (.48) .27
-------------------------------------------
Total from investment operations .96 .55 1.12 .07 .61
-------------------------------------------
Less distributions from:
Net investment income (.55) (.55) (.56) (.55) (.33)
-------------------------------------------
Net asset value, end of year $10.77 $10.36 $10.36 $ 9.80 $10.28
===========================================
Total return* 9.53% 5.55% 11.64% .94% 6.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $58,059 $39,693 $38,199 $20,794 $12,895
Ratios to average net assets:
Expenses .30% .25% .16% .10% .03%**
Expenses excluding waiver and payments by affiliate .82% .86% .86% .96% .83%**
Net investment income 5.11% 5.45% 5.51% 5.80% 4.85%**
Portfolio turnover rate 17.44% 18.27% 4.12% 44.61% 62.88%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA FUND
YEAR ENDED FEB. 28 1998 1997 1996 1995 19941
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.99 $10.02 $ 9.53 $10.07 $10.00
-------------------------------------------
Income from investment operations:
Net investment income .53 .53 .53 .52 .34
Net realized and unrealized gains (losses) .44 (.03) .49 (.53) .06
-------------------------------------------
Total from investment operations .97 .50 1.02 (.01) .40
-------------------------------------------
Less distributions from:
Net investment income (.53) (.53) (.53) (.53) (.33)
-------------------------------------------
Net asset value, end of year $10.43 $ 9.99 $10.02 $ 9.53 $10.07
===========================================
Total return* 9.94% 5.17% 10.95% .21% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $101,506 $77,177 $69,583 $46,847 $32,150
Ratios to average net assets:
Expenses .35% .35% .35% .35% -
Expenses excluding waiver and payments by affiliate .80% .80% .82% .88% .83%**
Net investment income 5.16% 5.36% 5.37% 5.61% 4.97%**
Portfolio turnover rate 8.08% 32.23% 24.36% 43.71% 28.72%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.15 $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08 $11.12
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .66 .69 .71 .71 .73 .74 .74 .78 .78 .78
Net realized and unrealized
gains (losses) .29 (.11) .30 (.48) .02 .75 .30 .16 .20 .03
---------------------------------------------------------------------------------------
Total from investment
operations .95 .58 1.01 .23 .75 1.49 1.04 .94 .98 .81
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.66) (.70) (.71) (.71) (.73) (.74) (.77) (.79) (.80) (.85)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains (.12) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.79) (.70) (.71) (.71) (.73) (.74) (.77) (.79) (.80) (.85)
---------------------------------------------------------------------------------------
Net asset value,
end of year $12.31 $12.15 $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08
=======================================================================================
Total return* 8.09% 4.88% 8.66% 2.03% 5.93% 12.93% 9.29% 8.38% 8.81% 7.38%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year (in millions) $1,685 $1,662 $1,705 $1,683 $1,803 $1,539 $1,131 $850 $711 $551
Ratio to average net assets:
Expenses .61% 60% .60% .59% .52% .53% .53% .53% .54% .58%
Net Investment Income 5.44% 5.68% 5.81% 6.00% 5.79% 6.22% 6.55% 6.95% 6.92% 7.01%
Portfolio turnover rate 27.77% 18.66% 13.52% 14.42% 6.85% 7.95% 6.35% 9.76% 11.96% 12.79%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19962
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $12.21 $12.31 $11.98
-------------------------------------------
Income from investment operations:
Net investment income .60 .62 .54
Net realized and unrealized gains (losses) .29 (.09) .32
-------------------------------------------
Total from investment operations .89 .53 .86
-------------------------------------------
Less distributions from:
Net investment income (.60) (.63) (.53)
Net realized gains (.12) - -
-------------------------------------------
Total distributions (.72) (.63) (.53)
-------------------------------------------
Net asset value, end of year $12.38 $12.21 $12.31
===========================================
Total return* 7.52% 4.42% 7.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $38,057 $21,521 $8,152
Ratios to average net assets:
Expenses 1.18% 1.17% 1.18%**
Net investment income 4.86% 5.10% 5.21%**
Portfolio turnover rate 27.77% 18.66% 13.52%
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.54 $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59 $10.61
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .61 .63 .66 .66 .67 .69 .68 .72 .72 .71
Net realized and unrealized
gains (losses) .35 (.10) .31 (.47) .09 .69 .31 .04 .12 (.02)
----------------------------------------------------------------------------------------
Total from investment operations .96 .53 .97 .19 .76 1.38 .99 .76 .84 .69
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.61) (.64)3 (.66) (.66) (.68) (.68) (.72) (.72) (.71) (.71)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains (.13) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.75) (.64) (.66) (.66) (.68) (.68) (.72) (.72) (.71) (.71)
----------------------------------------------------------------------------------------
Net asset value, end of year $11.75 $11.54 $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59
========================================================================================
Total return* 8.50% 4.75% 8.80% 1.83% 6.39% 12.61% 9.34% 7.10% 7.82% 6.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $328,147 $325,065 $301,529 $288,331 $307,013 $278,510 $218,336 $152,622 $123,906 $109,851
Ratios to average net assets:
Expenses .68% .68% .69% .67% .60% .64% .67% .70% .72% .75%
Expenses excluding waiver and
Payments by affiliate .68% .68% .69% .67% .60% .64% .67% .70% .72% .79%
Net investment income 5.21% 5.51% 5.67% 5.89% 5.69% 6.09% 6.40% 6.72% 6.65% 6.81%
Portfolio turnover rate 30.46% 29.22% 10.29% 16.90% 13.82% 9.65% 7.49% 11.47% 14.14% 22.97%
</TABLE>
<TABLE>
<CAPTION>
MASSACHUSETTS FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19962
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.59 $11.69 $11.36
------------------------------------------
Income from investment operations:
Net investment income .55 .57 .50
Net realized and unrealized gains (losses) .34 (.09) .32
------------------------------------------
Total from investment operations .89 .48 .82
------------------------------------------
Less distributions from:
Net investment income (.55) (.58)3 (.49)
Net realized gains (.13) - -
------------------------------------------
Total distributions (.68) (.58) (.49)
------------------------------------------
Net asset value, end of year $11.80 $11.59 $11.69
==========================================
Total return* 7.86% 4.22% 7.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $13,937 $6,378 $2,759
Ratios to average net assets:
Expenses 1.25% 1.25% 1.26%**
Net investment income 4.59% 4.96% 5.06%**
Portfolio turnover rate 30.46% 29.22% 10.29%
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.00 $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89 $10.89
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .66 .68 .69 .70 .71 .71 .75 .75 .74
Net realized and unrealized
gains (losses) .34 (.09) .34 (.48) .07 .77 .25 .12 .15 .03
---------------------------------------------------------------------------------------
Total from investment operations .97 .57 1.02 .21 .77 1.48 .96 .87 .90 .77
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.63) (.66)4 (.69)3 (.69) (.71) (.71) (.74) (.74) (.73) (.77)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains (.13) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.77) (.66) (.69) (.69) (.71) (.71) (.74) (.74) (.73) (.77)
---------------------------------------------------------------------------------------
Net asset value, end of year $12.20 $12.00 $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89
=======================================================================================
Total return* 8.37% 4.90% 8.86% 1.87% 6.18% 13.23% 8.78% 7.93% 8.21% 7.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $1,143 $1,112 $1,115 $1,038 $1,055 $882 $666 $515 $428 $370
Ratios to average net assets:
Expenses .63% .62% .62% .61% .54% .58% .59% .61% .63% .67%
Net investment income 5.24% 5.52% 5.65% 5.87% 5.66% 6.09% 6.45% 6.72% 6.72% 6.86%
Portfolio turnover rate 20.08% 30.03% 9.38% 9.12% 3.21% 2.04% 10.80% 4.17% 7.93% 9.83%
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19962
- ---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $12.07 $12.14 $11.77
----------------------------------------------
Income from investment operations:
Net investment income .57 .59 .51
Net realized and unrealized gains (losses) .33 (.07) .37
--------------------------------------------
Total from investment operations .90 .52 .88
--------------------------------------------
Less distributions from:
Net investment income (.57) (.59) (.51)
Net realized gains (.13) - -
--------------------------------------------
Total distributions (.70) (.59) (.51)
--------------------------------------------
Net asset value, end of year $12.27 $12.07 $12.14
==============================================
Total return** 7.70% 4.44% 7.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $32,873 $20,162 $6,683
Ratio to average net assets
Expenses 1.20% 1.19% 1.20%**
Net investment income 4.67% 4.94% 5.03%**
Portfolio turnover rate 20.08% 30.03% 9.38%
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.01 $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24 $11.26
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .65 .67 .69 .70 .73 .73 .76 .77 .76
Net realized and unrealized
gains (losses) .25 (.12) .27 (.45) (.01) .67 .28 .07 .18 .01
---------------------------------------------------------------------------------------
Total from investment
operations .89 .53 .94 .24 .69 1.40 1.01 .83 .95 .77
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.66) (.68) (.69)7 (.71) (.73) (.77) (.79) (.79) (.79)
Net realized gains (.10) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.74) (.66) (.68) (.69) (.71) (.73) (.77) (.79) (.79) (.79)
---------------------------------------------------------------------------------------
Net asset value, end of year $12.16 $12.01 $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24
=======================================================================================
Total return* 7.60% 4.54% 8.06% 2.12% 5.42% 12.23% 8.95% 7.29% 8.39% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $495,315 $482,128 $492,139 $479,934 $499,619 $445,767 $357,279 $284,779 $235,058 $183,867
Ratio to average net assets:
Expenses .65% .66% .66% .66% .60% .63% .65% .67% .70% .75%
Expenses excluding waiver and
Payments by affiliate .65% .66% .66% .66% .60% .63% .65% .67% .70% .76%
Net investment income 5.29% 5.47% 5.58% 5.81% 5.67% 6.12% 6.43% 6.62% 6.68% 6.80%
Portfolio Turnover Rate 14.87% 14.40% 17.72% 17.59% 13.42% 5.58% 3.14% 9.12% 4.55% 15.19%
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19962
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $12.05 $12.17 $11.89
------------------------------------------
Income from investment operations:
Net investment income .57 .59 .50
Net realized and unrealized gains (losses) .26 (.12) .28
------------------------------------------
Total from investment operations .83 .47 .78
------------------------------------------
Less distributions from:
Net investment income (.57) (.59) (.50)
Net realized gains (.10) - -
------------------------------------------
Total distributions (.67) (.59) (.50)
------------------------------------------
Net asset value, end of year $12.21 $12.05 $12.17
==========================================
Total return* 7.04% 3.98% 6.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,131 $4,844 $1,152
Ratios to average net assets:
Expenses 1.22% 1.23% 1.25%**
Net investment income 4.72% 4.87% 4.94%**
Portfolio turnover rate 14.87% 14.40% 17.72%
</TABLE>
<TABLE>
<CAPTION>
OHIO FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.19 $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02 $10.93
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .66 .68 .69 .70 .72 .71 .75 .75 .74
Net realized and unrealized
gains (losses) .33 (.03) .33 (.50) .07 .78 .28 .17 .14 .08
----------------------------------------------------------------------------------------
Total from investment
operations .97 .63 1.01 .19 .77 1.50 .99 .92 .89 .82
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64)6 (.66)5 (.69)3 (.69) (.71) (.71) (.77) (.76) (.74) (.73)
Net realized gains (.07) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.71) (.66) (.69) (.69) (.71) (.71) (.77) (.76) (.74) (.73)
----------------------------------------------------------------------------------------
Net asset value,
end of year $12.45 $12.19 $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02
========================================================================================
Total return* 8.22% 5.35% 8.66% 1.74% 6.08% 13.26% 8.86% 8.28% 8.00% 7.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $741,079 $698,360 $685,783 $652,545 $686,398 $564,758 $409,044 $273,119 $224,722 $203,230
Ratios to average net assets:
Expenses .64% .64% .64% .63% .56% .59% .62% .65% .65% .71%
Net investment income 5.24% 5.43% 5.58% 5.83% 5.59% 6.05% 6.36% 6.67% 6.71% 6.80%
Portfolio turnover rate 12.84% 14.95% 11.47% 11.76% 7.29% 2.87% 1.16% 4.44% 10.80% 32.48%
</TABLE>
<TABLE>
<CAPTION>
OHIO FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19962
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $12.24 $12.26 $11.90
------------------------------------------
Income from investment operations:
Net investment income .58 .59 .52
Net realized and unrealized gains (losses) .34 (.02) .35
------------------------------------------
Total from investment operations .92 (.57) .87
------------------------------------------
Less distributions from:
Net investment income (.58) (.59) (.51)
Net realized gains (.07) - -
------------------------------------------
Total distributions (.65) (.59) (.51)
------------------------------------------
Net asset value, end of year $12.51 $12.24 $12.26
==========================================
Total return* 7.66% 4.79% 7.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $28,178 $15,786 $6,085
Ratios to average net assets:
Expenses 1.20% 1.20% 1.22%**
Net investment income 4.67% 4.80% 4.99%**
Portfolio turnover rate 12.84% 14.95% 11.47%
</TABLE>
* Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized
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
$.003.
6Includes distributions in excess of net investment income in the amount of
$.007.
7Includes distributions from net realized gains of $.004.
HOW DO THE FUNDS INVEST THEIR ASSETS?
A QUICK LOOK AT THE FUNDS
<TABLE>
<CAPTION>
FRANKLIN INSURED STATE SPECIFIC INSURED
TAX-FREE INCOME FUND TAX-FREE INCOME FUNDS
- -------------------- ----------------------
<S> <C>
GOAL: High current income free from federal income GOAL: High current tax-free income for residents of
taxes. the fund's state.
STRATEGY: Invests primarily in municipal securities STRATEGY: Invest primarily in municipal securities
covered by insurance guaranteeing the timely payment covered by insurance guaranteeing the timely payment
of principal and interest and whose interest is free of principal and interest and whose interest is free
from federal income taxes. from federal and state personal income taxes, if any,
for residents of the fund's state.
</TABLE>
WHAT IS THE MANAGER'S APPROACH?
Advisers tries to select securities that it believes will provide the best
balance between risk and return within each fund's range of allowable
investments. Advisers considers a number of factors including general market and
economic conditions, the credit quality of the issuer, and the cost of insurance
when selecting securities for each fund.
To provide tax-free income to shareholders, Advisers typically uses a buy and
hold strategy. This means it holds securities in a fund's portfolio for income
purposes, rather than trading securities for capital gains. Advisers may sell a
security at any time, however, when Advisers believes doing so could help the
fund meet its goals.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses. Each
fund's focus on income does not mean it invests only in the highest-yielding
securities available, or that it can avoid losses of principal.
WHO MAY WANT TO INVEST?
The funds may be appropriate for investors in higher tax brackets who seek high
current income that is free from federal and, for the state funds, state
personal income taxes.
The value of each fund's investments and the income they generate will vary from
day to day, and generally reflect interest rates, market conditions, and other
federal and state political and economic news. When you sell your shares, they
may be worth more or less than what you paid for them. Please consider your
investment goals and tolerance for price fluctuations and risk when making your
investment decision.
THE FUNDS IN MORE DETAIL
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent investing,
while seeking preservation of shareholders' capital. Each state fund also tries
to provide a maximum level of income that is exempt from personal income taxes,
if any, for resident shareholders of the fund's state. These goals are
fundamental, which means that they may not be changed without shareholder
approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public or private projects. The issuer
pays a fixed or variable rate of interest, and must repay the amount borrowed
(the "principal") at maturity.
Municipal securities help the funds meet their investment goals because they
generally pay interest free from federal income tax. Municipal securities issued
by a fund's state or that state's counties, municipalities, authorities,
agencies, or other subdivisions, as well as municipal securities issued by U.S.
territories such as Guam, Puerto Rico, or the Mariana Islands, also generally
pay interest free from state personal income taxes, if any, for residents of the
fund's state.
Each fund normally invests:
o at least 80% of its net assets in securities that pay interest free from
federal income taxes, including the federal alternative minimum tax (this
policy is fundamental);
o at least 80% of its net assets in securities that pay interest free from
the personal income taxes, if any, of its state, although each fund tries
to invest all of its assets in these securities (this policy is fundamental
and applies only to the state funds); and
o at least 65% of its total assets in municipal securities of its state.
Unlike the state funds, however, 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.
While each fund tries to invest 100% of its assets in municipal securities whose
interest is free from federal and, for the state funds, state personal income
taxes, it is possible, although not anticipated, that a fund may have up to 20%
of its assets in securities that pay taxable interest. If you are subject to the
federal alternative minimum tax, please keep in mind that each fund may also
have a portion of its assets in municipal securities that pay interest subject
to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on
the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities based
on their opinion of the issuer's credit quality. Most rating agencies use a
descending alphabet scale to rate long-term securities, and a descending
numerical scale to rate short-term securities. For example, Fitch and S&P use
AAA, AA, A and BBB for their top four long-term ratings, while Moody's uses Aaa,
Aa, A and Baa. Securities rated in the highest rating category are "top rated."
Securities in the top four ratings are "investment grade," although securities
in the fourth highest rating may have some speculative features. These ratings
are described in more detail in the SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered by
an insurance policy that insures the timely payment of principal and interest.
Other municipal securities may be backed by letters of credit, guarantees, or
escrow or trust accounts that contain securities backed by the full faith and
credit of the U.S. government to secure the payment of principal and interest.
o Each fund invests at least 65% of its total assets in insured municipal
securities. Each fund pays insurance premiums either directly or
indirectly, which increases the credit safety of its insured investments,
but decreases its yield. It is important to note that the insurance does
not guarantee the market value of a security, or a fund's shares or
distributions, and shares of a fund are not insured.
Each fund may invest the balance of its assets in the following types of
uninsured securities: (i) municipal securities secured by an escrow or
trust account containing direct U.S. government obligations; (ii)
securities rated in one of the top three ratings or unrated securities that
Advisers believes are comparable in quality; or (iii) top rated short-term,
tax-free securities, pending investment in longer-term municipal
securities. Each fund may only invest up to 20% of its total assets in the
type of securities described in (ii) above.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically range
from less than one year (short term) to 30 years (long term). In general,
securities with longer maturities are more sensitive to price changes, although
they may provide higher yields.
o The funds have no restrictions on the maturity of the securities they may
buy or on their average portfolio maturity.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either at
specific intervals or whenever a benchmark rate changes. While this feature
helps to protect against a decline in the security's market price, it also
lowers a fund's income when interest rates fall. Of course, a fund's income from
its variable rate investments may also increase if interest rates rise.
o Each fund may invest in top rated variable and floating rate securities.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body must
set aside the money to make the lease payments each year. If the money is not
set aside, the issuer or the lessee can end the lease without penalty. If the
lease is cancelled, investors who own the municipal lease obligations may not be
paid.
o Each fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes unusual or adverse economic,
market or other conditions exist, it may invest a fund's portfolio in a
temporary defensive manner. Under these circumstances, each fund may invest all
of its assets in securities that pay taxable interest, including (i) high
quality commercial paper; (ii) securities issued by or guaranteed by the full
faith and credit of the U.S. government; or (iii) for the state funds, municipal
securities issued by a state or local government other than the fund's state, or
by a U.S. territory such as Guam, Puerto Rico or the Mariana Islands.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price of
the security may fluctuate during the time before payment and delivery, the fund
assumes the risk that the value of the security at delivery may be more or less
than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money invested
in any one issuer or, on a broader scale, in any one state or type of project to
help spread and reduce the risks of investment. Non-diversified funds may invest
a greater portion of their assets in the securities of one issuer than
diversified funds. Economic, business, political or other changes can affect all
securities of a similar type. A non-diversified fund may be more sensitive to
these changes.
o The Arizona and Florida funds are non-diversified funds, although they
intend to meet certain diversification requirements for tax purposes. The
other funds are all diversified. Each fund may invest more than 25% of its
assets in municipal securities that finance similar types of projects, such
as hospitals, housing, industrial development, transportation or pollution
control.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional investment
policies and restrictions that govern its activities. Those that are identified
as "fundamental" may only be changed with shareholder approval. The others may
be changed by the Board alone. For a list of these restrictions and more
information about each fund's investment policies, including those described
above, please see "How Do the Funds Invest Their Assets?" and "Investment
Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in the
SAI apply when a fund makes an investment. In most cases, a fund is not required
to sell a security because circumstances change and the security no longer meets
one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
Like all investments, an investment in a fund involves risks. The risks of each
fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in one of the state funds
may involve more risk than an investment in a fund that does not focus on
securities of a single state. Because each fund holds many securities, it is
likely to be less risky than any one, or few, directly held municipal
investments.
GENERAL RISK. There is no assurance that a fund will meet its investment goal. A
fund's share price, and the value of your investment, may change. Generally,
when the value of a fund's investments go down, so does the fund's share price.
Similarly, when the value of a fund's investments go up, so does the fund's
share price. Since the value of a fund's shares can go up or down, it is
possible to lose money by investing in a fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices fall.
The opposite is also true: municipal security prices go up when interest rates
fall. To explain why this is so, assume you hold a municipal security offering a
5% yield. A year later, interest rates are on the rise and comparable securities
are offered with a 6% yield. With higher-yielding securities available, you
would have trouble selling your 5% security for the price you paid - causing you
to lower your asking price. On the other hand, if interest rates were falling
and 4% municipal securities were being offered, you would be able to sell your
5% security for more than you paid.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain because
of the possibility of adverse foreign economic, political or legal developments
that may affect the ability of that foreign entity to meet its obligations.
Changes in the credit quality of the credit provider could affect the value of
the security and the fund's share price.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called") before
maturity. An issuer is more likely to call its bonds when interest rates are
falling, because the issuer can issue new bonds with lower interest payments. If
a bond is called, a fund may have to replace it with a lower-yielding security.
STATE RISKS. Since each state fund invests heavily in municipal securities of
its state, events in that state are likely to affect the fund's investments and
its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to municipal issuers.
A negative change in any one of these or other areas could affect the ability of
a state's municipal issuers to meet their obligations. It is important to
remember that economic, budget and other conditions within a state are
unpredictable and can change at any time.
To the extent the Franklin Insured Tax-Free Income Fund is invested in a state,
events in that state may effect its investments and its performance.
For more specific information on the economy and financial strength of the
funds' various states, please see "What Are the Risks of Investing in the
Funds?" in the SAI.
U.S. TERRITORIES RISKS. Each fund may invest a portion of its assets in
municipal securities issued by U.S. territories such as Guam, Puerto Rico or the
Mariana Islands. As with state municipal securities, events in any of these
territories where a fund invests may affect the fund's investments and its
performance.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors the funds to ensure no material conflicts exist among
the funds' classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages each 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 $232 billion in assets, including $48 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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been an analyst or portfolio manager for the Arizona and Florida
funds since their inception and the Massachusetts, Michigan, Minnesota, Insured
and Ohio funds since 1987. 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 securities industry-related
committees and associations.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been an analyst or portfolio manager for the Arizona and Florida
funds since their inception and the Massachusetts, Michigan, Minnesota, Insured
and Ohio funds since 1989. Mr. Pomeroy 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.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been an analyst or portfolio manager for the Arizona Fund since
its inception and the Michigan, Minnesota, Insured and Massachusetts funds since
1987. 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.
Stella Wong
Vice President of Advisers
Ms. Wong has been an analyst or portfolio manager for the Florida Fund since its
inception and the Ohio Fund since 1986. 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.
MANAGEMENT FEES. During the fiscal year ended February 28, 1998, management fees
paid to Advisers and total operating expenses, as a percentage of average
monthly net assets, were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
-------------------------------------------
Arizona Fund....................... 0.11%* 0.30%* -
Florida Fund....................... 0.18%* 0.35%* -
Insured Fund....................... 0.47% 0.61% 1.18%
Massachusetts Fund................. 0.52% 0.68% 1.25%
Michigan Fund...................... 0.47% 0.63% 1.20%
Minnesota Fund..................... 0.50% 0.65% 1.22%
Ohio Fund.......................... 0.49% 0.64% 1.20%
*Management fees, before any advance waiver, totaled 0.63% for the Arizona and
Florida funds. Total operating expenses were 0.82% 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 Do the Funds Buy
Securities for Their Portfolios?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for each fund. During the fiscal
year ended February 28, 1998, administration fees paid to FT Services, as a
percentage of average daily net assets, were as follows:
ADMINISTRATION FEES
-------------------
Arizona Fund ................. 0.15%
Florida Fund .................. 0.15%
Insured Fund .................. 0.11%
Massachusetts Fund ............ 0.14%
Michigan Fund ................. 0.12%
Minnesota Fund ................ 0.14%
Ohio Fund ..................... 0.14%
These fees are paid by Advisers. They are not a separate expense of the funds.
Please see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
Each fund and class 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. 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 their Class I plans 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, Securities Dealers may not be eligible to
receive the Rule 12b-1 fees associated with the purchase.
Under the Class II plans, a 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, Securities
Dealers may not be eligible to receive this portion of the Rule 12b-1 fees
associated with the purchase.
A 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 plans. 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
Funds' Underwriter" in the SAI.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the funds advertise their performance. Commonly used measures
of performance include total return, current yield and current distribution
rate. Each fund 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 fund will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how each fund calculates its performance figures, please
see "How Do the Funds Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES TO THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
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TAXATION OF THE FUNDS' INVESTMENTS. Each fund invests your HOW DO THE FUNDS EARN INCOME AND GAINS?
money in municipal and other securities described in the Each fund earns interest and other income (the fund's "income") on
section "How Do the Funds Invest Their Assets?" Special tax its investments. When a fund sells a security for a price that is
rules may apply when determining the income and gains that higher than it paid, it has a gain. When a fund sells a security
each fund earns on its investments. These rules may, in turn, for a price that is lower than it paid, it has a loss. If a fund
affect the amount of distributions that a fund pays to you. has held the security for more than one year, the gain or loss
These special tax rules are discussed in the SAI. will be a long-term capital gain or loss. If a fund has held the
security for one year or less, the gain or loss will be a
TAXATION OF THE FUNDS. As a regulated investment company, short-term capital gain or loss. A fund's gains and losses are
each fund generally pays no federal income tax on the income netted together, and, if the fund has a net gain (the fund's
and gains that it distributes to you. "gains"), that gain will generally be distributed to you.
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TAXATION OF SHAREHOLDERS
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DISTRIBUTIONS. Distributions made to you from interest income WHAT IS A DISTRIBUTION?
on municipal securities will be exempt from the regular ------------------------------------------------------------------
federal income tax. Distributions made to you from other As a shareholder, you will receive your share of a fund's income
income on temporary investments, short-term capital gains, or and gains on its investments. A fund's interest income on
ordinary income from the sale of market discount bonds will be municipal securities is paid to you as exempt-interest dividends.
taxable to you as ordinary dividends, whether you receive them A fund's ordinary income and short term capital gains are paid to
in cash or in additional shares. Distributions made to you you as ordinary dividends. A fund's long-term capital gains are
from interest on certain private activity bonds, while still paid to you as capital gain distributions. If a fund pays you an
exempt from the regular federal income tax, are a preference amount in excess of its income and gains, this excess will
item when determining your alternative minimum tax. The fund generally be treated as a non-taxable distribution. These amounts,
will send you a statement in January of the current year that taken together, are what we call a fund's distributions to you.
reflects the amount of exempt-interest dividends, ordinary ------------------------------------------------------------------
dividends, capital gain distributions, interest income that is
a tax preference item under the alternative minimum tax and
non-taxable distributions you received from the fund in the
prior year. This statement will include distributions
declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the
prior year. The IRS requires you to report these amounts on
your income tax return for the prior year. A fund's statement
for the prior year will tell you how much of your capital gain
distribution represents 28% rate gain. The remainder of the
capital gain distribution represents 20% rate gain.
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DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the funds'
distributions will qualify for the corporate dividends-received deduction.
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REDEMPTIONS AND EXCHANGES. If you redeem your shares or if WHAT IS A REDEMPTION?
you exchange your shares in the funds for shares in another ------------------------------------------------------------------
Franklin Templeton Fund, you will generally have a gain or A redemption is a sale by you to the fund of some or all of your
loss that the IRS requires you to report on your income tax shares in the fund. The price per share you receive when you
return. If you exchange fund shares held for 90 days or less redeem fund shares may be more or less than the price at which you
and pay no sales charge, or a reduced sales charge, for the purchased those shares. An exchange of shares in the fund for
new shares, all or a portion of the sales charge you paid on shares of another Franklin Templeton Fund is treated as a
the purchase of the shares you exchanged is not included in redemption of fund shares and then a purchase of shares of the
their cost for purposes of computing gain or loss on the other fund. When you redeem or exchange your shares, you will
exchange. If you hold your shares for six months or less, generally have a gain or loss, depending upon whether the amount
any loss you have will be disallowed to the extent of any you receive for your shares is more or less than your cost or
exempt-interest dividends paid on your shares. Any such loss other basis in the shares. Please call Fund Information for a free
not disallowed will be treated as a long-term capital loss to shareholder Tax Information Handbook if you need more information
the extent of any long-term capital gain distributions paid on on calculating the gain or loss on the redemption or exchange of
your shares. All or a portion of any loss on the redemption or your shares.
exchange of your shares will be disallowed by the IRS if you ------------------------------------------------------------------
buy other shares in the fund within 30 days before or after
your redemption or exchange.
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STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the funds, and gains arising from redemptions or exchanges of your fund
shares, will generally be subject to state and local income tax. Distributions
paid from the interest earned on municipal securities of a state, or its
political subdivisions, will generally be exempt from that state's personal
income taxes. Dividends paid from interest earned on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands and Guam) will also be exempt from that state's personal income taxes. A
state does not, however, grant tax-free treatment to interest on investments in
municipal securities of other states. Corporate taxpayers subject to a state's
corporate income or franchise tax may be subject to special rules. The holding
of fund shares may also be subject to state and local intangibles taxes. Each
fund in which you are a shareholder will provide you with information at the end
of each calendar year on the amounts of such dividends that may qualify for
exemption from reporting on your individual income tax returns. You may wish to
contact your tax advisor to determine the state and local tax consequences of
your investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS. Exempt-interest dividends paid
to you, although exempt from the regular federal income tax, are includible in
the tax base for determining the taxable portion of your social security or
railroad retirement benefits. The IRS requires you to disclose these
exempt-interest dividends on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends,
exempt-interest dividends, capital gain distributions and gains arising from
redemptions or exchanges of your fund shares. Fund shares held by the estate of
a non-U.S. investor may be subject to U.S. estate tax. You may wish to contact
your tax advisor to determine the U.S. and non-U.S. tax consequences of your
investment in a fund.
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BACKUP WITHHOLDING. When you open an account, IRS regulations WHAT IS A BACKUP WITHHOLDING?
require that you provide your taxpayer identification number -----------------------------------------------------------------
("TIN"), certify that it is correct, and certify that you are Backup withholding occurs when a fund is required to withhold and
not subject to backup withholding under IRS rules. If you fail pay over to the IRS 31% of your distributions and redemption
to provide a correct TIN or the proper tax certifications, proceeds. You can avoid backup withholding by providing the fund
the IRS requires the fund to withhold 31% of all the with your TIN, and by completing the tax certifications on your
distributions (including ordinary dividends and capital gain shareholder application that you were asked to sign when you
distributions), and redemption proceeds paid to you. The fund opened your account. However, if the IRS instructs the fund to
is also required to begin backup withholding on your account begin backup withholding, it is required to do so even if you
if the IRS instructs the fund to do so. The fund reserves the provided the fund with your TIN and these tax certifications, and
right not to open your account, or, alternatively, to redeem backup withholding will remain in place until the fund is
your shares at the current Net Asset Value, less any taxes instructed by the IRS that it is no longer required.
withheld, if you fail to provide a correct TIN, fail to -----------------------------------------------------------------
provide the proper tax certifications, or the IRS instructs
the fund to begin backup withholding on your account.
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THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" AND "APPENDICES - STATE TAX TREATMENT"
IN THE SAI. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS,
FOREIGN TAXES PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE
FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING
FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The funds are series of the Franklin Tax-Free Trust (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, and 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, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT NONE OF THE FUNDS,
EXCEPT THE INSURED FUND, CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges
now, you can avoid the delay and inconvenience of having to send an
additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It is important that
we receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.
4. Make your investment using the table below.
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METHOD STEPS TO FOLLOW
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BY MAIL For an initial investment:
Return the application to the fund with your check made payable to the
fund.
For additional investments:
Send a check made payable to the fund. Please include your account
number on the check.
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BY WIRE 1. Call Shareholder Services or, if that number is busy, call
1-650/312-2000 collect, to receive a wire control number and wire
instructions. You need a new wire control number every time you wire
money into your account. If you do not have a currently effective wire
control number, we will return the money to the bank, and we will not
credit the purchase to your account.
2. For an initial investment you must also return your signed
shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before 1:00 p.m. Pacific time
and the bank receives the wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will credit the purchase to your
account that day. If we receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit the purchase to your
account the following business day.
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THROUGH YOUR DEALER Call your investment representative
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CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
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CLASS I CLASS II
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o Higher front-end sales charges than Class II o Lower front-end sales charges than Class I shares
shares. There are several ways to reduce these
charges, as described below. There is no front-end
sales charge for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on purchases of o Contingent Deferred Sales Charge on purchases sold
$1 million or more sold within one year within 18 months
o Lower annual expenses than Class II shares o Higher annual expenses than Class I shares
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*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
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 TO
AS A PERCENTAGE OF 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 "Choosing a Share
Class."
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. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the SAME CLASS of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in Class I shares of
the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the SAME CLASS of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of fund shares and a new Contingency Period
will begin. We will, however, credit your fund account with additional
shares based on the Contingent Deferred Sales Charge you paid and the
amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. 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 goal 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.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares you want to
exchange
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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.
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THROUGH YOUR DEALER Call your investment representative
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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, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see "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 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 funds, such as "Advisor Class" or "Class Z" shares. Because the
funds do not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of a 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 a fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions. 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.
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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.
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THROUGH YOUR DEALER Call your investment representative
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</TABLE>
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 funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their 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 until your check or draft has cleared, which may take
seven business days or more. 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 Account fees
o Redemptions by a 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 FUNDS?
Each 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.
The funds declare dividends from their net investment income daily and pay 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 each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR SHARES.
If you buy shares shortly before a fund deducts a capital gain distribution from
its Net Asset Value, please keep in mind that you will receive a portion of the
price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from a 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 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 - Class I
Only" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
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
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
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.
HOW AND WHEN SHARES ARE PRICED
The funds are open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 1:00
p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price 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. Each fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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. 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.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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.
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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 told us that
you do not want telephone privileges to apply to your account.
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 a fund. Under
the plan, you can have money transferred automatically from your checking
account to a 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 a 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 a 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.
Once your plan is established, any distributions paid by the fund will be
automatically reinvested in your account.
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 by mail or by
phone 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 a 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
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 122 222
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 funds 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 funds' financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds 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 funds 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 funds, 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 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 funds' 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, offer
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. The holding period for Class I begins on the first day of
the month in which you buy shares. Regardless of when during the month you buy
Class I shares, they will age one month on the last day of that month and each
following month. The holding period for Class II begins on the day you buy your
shares. For example, if you buy Class II shares on the 18th of the month, they
will age one month on the 18th day of the next 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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.
PROSPECTUS & APPLICATION
FRANKLIN TAX-FREE TRUST
JULY 1, 1998
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
FRANKLIN VIRGINIA TAX-FREE INCOME FUND
INVESTMENT STRATEGY: TAX-FREE INCOME
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated July 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE 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, 1998
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 FUNDS
Expense Summary..........................................
Financial Highlights.....................................
How Do the Funds Invest Their Assets?....................
What Are the Risks of Investing in the Funds?............
Who Manages the Funds?...................................
How Do the Funds Measure Performance?....................
How Taxation Affects the Funds and Their Shareholders....
How Is the Trust Organized?.....................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Funds?.......
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a
fund. It is based on the historical expenses of each fund for the fiscal year
ended February 28, 1998. Each 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
Maximum Sales Charge
(as a percentage of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.56% 0.47% 0.59% 0.63%* 0.60% 0.56% 0.54% 0.54% 0.60% 0.53%
Rule 12b-1 Fees** 0.09% 0.09% 0.09% 0.10% 0.09% 0.09% 0.09% 0.09% 0.08% 0.09%
Other Expenses 0.07% 0.05% 0.08% 0.08% 0.07% 0.09% 0.08% 0.07% 0.08% 0.07%
-----------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses 0.72% 0.61% 0.76% 0.81%* 0.76% 0.74% 0.71% 0.70% 0.76% 0.69%
=====================================================================================================
CLASS II
Management Fees 0.56% 0.47% 0.59% - 0.60% 0.56% 0.54% 0.54% 0.60% 0.53%
Rule 12b-1 Fees** 0.65% 0.65% 0.65% - 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses 0.07% 0.05% 0.08% - 0.07% 0.09% 0.08% 0.07% 0.08% 0.07%
-----------------------------------------------------------------------------------------------------
Total Fund Operating
Expenses 1.28%*** 1.17% 1.32% - 1.32% 1.30% 1.27% 1.26% 1.33% 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 a 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**** $ 50 $ 48 $ 50 $ 50 $ 50 $ 50 $ 49 $ 49 $ 50 $ 49
3 Years $ 65 $ 61 $ 66 $ 67 $ 66 $ 65 $ 64 $ 64 $ 66 $ 64
5 Years $ 81 $ 75 $ 83 $ 86 $ 83 $ 82 $ 80 $ 80 $ 83 $ 79
10 Years $128 $115 $133 $138 $133 $130 $127 $126 $133 $125
CLASS II
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 33 $ 32 $ 33 - $ 33 $ 33 $ 33 $ 33 $ 33 $33
3 Years $ 50 $ 47 $ 51 - $ 51 $ 51 $ 50 $ 50 $ 52 $49
5 Years $ 80 $ 74 $ 82 - $ 82 $ 81 $ 79 $ 78 $ 82 $78
10 Years $164 $151 $167 - $167 $165 $162 $161 $169 $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. Each
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.
+++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? - Choosing a Share Class."
++++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 you would pay is
the same. 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 0.17% and total operating
expenses were 0.35%.
**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.
***Class II total fund operating expenses are different than the ratio of
expenses to average net assets shown under "Financial Highlights" due to a
timing difference between the end of the 12b-1 plan year and the fund's fiscal
year end.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the funds' 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, 1998. The Annual Report to Shareholders also includes
more information about each fund's performance. For a free copy, please call
Fund Information.
<TABLE>
<CAPTION>
ALABAMA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.73 $11.73 $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59 $10.54
--------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .65 .66 .66 .66 .68 .66 .71 .75 .79
Net realized & unrealized
gains (losses) .36 .01 .42 (.50) .09 .71 .35 .07 .17 .01
--------------------------------------------------------------------------------------------
Total from investment
operations 1.00 .66 1.08 .16 .75 1.39 1.01 .78 .92 .80
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.65) (.66) (.66) (.65) (.66) (.68) (.76) (.77) (.77) (.72)
Net realized gains (.10) - - - - - - - - (.02)
--------------------------------------------------------------------------------------------
Total distributions (.75) (.66) (.66) (.65) (.66) (.68) (.76) (.77) (.77) (.75)
--------------------------------------------------------------------------------------------
Net asset value,
end of year $11.98 $11.73 $11.73 $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59
============================================================================================
Total return* 8.79% 5.84% 9.74% 1.54% 6.35% 12.84% 9.51% 7.27% 8.61% 7.59%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $216,982 $193,466 $185,981 $170,051 $178,414 $144,480 $96,254 $50,182 $21,685 $6,079
Ratios to average net assets:
Expenses .72% .71% .72% .72% .64% .68% .71% .70% .42% -%
Expenses excluding
waiver and payments
by affiliate .72% .71% .72% .72% .64% .68% .71% .72% .72% .74%
Net investment income 5.39% 5.62% 5.69% 5.88% 5.62% 6.04% 6.21% 6.45% 6.69% 7.33%
Portfolio turnover rate 10.44% 15.47% 12.39% 19.85% 14.87% 11.27% 1.21% 28.36% 4.97% 12.70%
</TABLE>
<TABLE>
<CAPTION>
ALABAMA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.78 $11.77 $11.36
-------------------------------------------
Income from investment operations:
Net investment income .58 .59 .49
Net realized & unrealized gains .36 .01 .41
-------------------------------------------
Total from investment operations .94 .60 .90
-------------------------------------------
Less distributions from:
Net investment income (.58) (.59) (.49)
Net realized gains (.10) - -
-------------------------------------------
Total distributions (.68) (.59) (.49)
-------------------------------------------
Net asset value, end of year $12.04 $11.78 $11.77
===========================================
Total return* 8.23% 5.28% 8.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $9,469 $5,683 $1,662
Ratios to average net assets:
Expenses 1.29% 1.28% 1.29%**
Net investment income 4.80% 5.05% 5.09%**
Portfolio turnover rate 10.44% 15.47% 12.39%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.59 $11.69 $11.35 $11.77 $11.68 $11.04 $10.75 $10.73 $10.59 $10.61
--------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .67 .69 .69 .70 .71 .71 .73 .73 .81
Net realized & unrealized
gains (losses) .30 (.08) .34 (.44) .09 .65 .35 .09 .23 (.04)
--------------------------------------------------------------------------------------------
Total from investment
operations .94 .59 1.03 .25 .79 1.36 1.06 .82 .96 .77
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.65) (.69) (.69) (.67) (.70) (.72) (.77) (.80) (.82) (.78)
In excess of net
investment income (.01) - - - - - - - - (.01)
--------------------------------------------------------------------------------------------
Total distributions (.66) (.69) (.69) (.67) (.70) (.72) (.77) (.80) (.82) (.79)
--------------------------------------------------------------------------------------------
Net asset value,
end of year $11.87 $11.59 $11.69 $11.35 $11.77 $11.68 $11.04 $10.75 $10.73 $10.59
============================================================================================
Total return* 8.37% 5.20% 9.28% 2.36% 6.63% 12.45% 10.02% 7.69% 8.98% 7.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
of year (millions) $1,650 $1,458 $1,354 $1,265 $1,362 $1,165 $886 $606 $302 $34
Ratios to average net assets:
Expenses .61% .60% .60% .59% .52% .54% .54% .57% .66% .24%
Expenses excluding waiver
and payments by affiliate .61% .60% .60% .59% .52% .54% .54% .57% .66% .74%
Net investment income 5.45% 5.78% 5.93% 6.15% 5.90% 6.30% 6.60% 6.76% 6.40% 6.42%
Portfolio turnover rate 5.60% 12.00% 11.78% 14.34% 11.77% 11.72% 16.69% 10.80% 8.50% 8.64%
</TABLE>
<TABLE>
<CAPTION>
FLORIDA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.67 $11.76 $11.37
-------------------------------------------
Income from investment operations:
Net investment income .60 .60 .52
Net realized & unrealized
gains (losses) .29 (.07) .38
-------------------------------------------
Total from investment operations .89 .53 .90
-------------------------------------------
Less distributions from:
Net investment income (.59) (.62) (.51)
In excess of net investment income (.01) - -
-------------------------------------------
Total distributions (.60) (.62) (.51)
-------------------------------------------
Net asset value, end of year $11.96 $11.67 $11.76
===========================================
Total return* 7.80% 4.65% 8.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $56,027 $23,556 $7,644
Ratios to average net assets:
Expenses 1.17% 1.17% 1.18%**
Net investment income 4.88% 5.17% 5.33%**
Portfolio turnover rate 5.60% 12.00% 11.78%
</TABLE>
<TABLE>
<CAPTION>
GEORGIA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.86 $11.88 $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59 $10.55
--------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .65 .66 .66 .66 .68 .65 .72 .79 .80
Net realized & unrealized
gains (losses) .27 (.02) .34 (.46) .15 .66 .35 .10 .26 (.03)
--------------------------------------------------------------------------------------------
Total from investment
operations .90 .63 1.00 .20 .81 1.34 1.00 .82 1.05 .77
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64)1 (.65) (.66) (.66) (.66) (.67) (.76) (.78) (.74) (.72)
Net realized gains - - - - - - - - - (.01)
--------------------------------------------------------------------------------------------
Total distributions (.64)1 (.65) (.66) (.66) (.66) (.67) (.76) (.78) (.74) (.73)
--------------------------------------------------------------------------------------------
Net asset value,
end of year $12.12 $11.86 $11.88 $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59
============================================================================================
Total return* 7.75% 5.47% 8.90% 1.87% 6.77% 12.09% 9.32% 7.53% 9.94% 7.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $149,642 $139,903 $130,380 $116,771 $120,882 $91,017 $68,546 $32,011 $13,877 $5,640
Ratios to average net assets:
Expenses .76% .75% .77% .76% .69% .71% .72% .56% .09% -%
Expenses excluding waiver
and payments by affiliate .76% .75% .77% .76% .69% .71% .72% .74% .74% .76%
Net investment income 5.28% 5.49% 5.58% 5.76% 5.48% 5.91% 6.11% 6.53% 7.07% 7.31%
Portfolio turnover rate 14.77% 17.47% 10.98% 36.17% 16.75% 17.10% 6.18% 1.20% 14.43% 12.23%
</TABLE>
<TABLE>
<CAPTION>
GEORGIA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.92 $11.92 $11.57
-------------------------------------------
Income from investment operations:
Net investment income .57 .58 .50
Net realized & unrealized
gains (losses) .27 (.01) .34
-------------------------------------------
Total from investment operations .84 .57 .84
-------------------------------------------
Less distributions from net investment income (.57) (.57) (.49)
-------------------------------------------
Net asset value, end of year $12.19 $11.92 $11.92
===========================================
Total return* 7.19% 4.97% 7.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $9,107 $4,484 $1,335
Ratios to average net assets:
Expenses 1.32% 1.32% 1.34%**
Net investment income 4.72% 4.87% 5.04%**
Portfolio turnover rate 14.77% 17.47% 10.98%
</TABLE>
<TABLE>
<CAPTION>
KENTUCKY FUND
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 19922
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.05 $11.04 $10.54 $11.18 $11.05 $10.30 $10.00
----------------------------------------------------------------------------
Income from investment operations:
Net investment income .61 .61 .62 .61 .63 .57 .15
Net realized & unrealized
gains (losses) .40 .01 .50 (.62) .16 .83 .16
----------------------------------------------------------------------------
Total from investment operations 1.01 .62 1.12 (.01) .79 1.40 .31
--------------------------------------------------------------------------
Less distributions from net
investment income (.61) (.61) (.62) (.63) (.66) (.65) (.01)
----------------------------------------------------------------------------
Net asset value, end of year $11.45 $11.05 $11.04 $10.54 $11.18 $11.05 $10.30
============================================================================
Total return* 9.38% 5.86% 10.73% .11% 7.07% 13.81% 8.37%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $54,211 $44,289 $38,991 $32,831 $28,057 $11,678 $3,032
Ratios to average net assets:
Expenses .35% .34% .33% .29% -% -% -%
Expenses excluding waiver and
payments by affiliate .81% .81% .82% .80% .71% .81% .82%**
Net investment income 5.40% 5.63% 5.65% 5.94% 5.73% 6.11% 3.52%**
Portfolio turnover rate 26.61% 24.81% 31.89% 32.92% 13.22% 18.41% 53.90%
</TABLE>
<TABLE>
<CAPTION>
LOUISIANA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.32 $11.32 $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39 $10.41
---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .65 .66 .66 .67 .69 .67 .71 .78 .78
Net realized & unrealized
gains (losses) .30 - .28 (.55) (.01) .67 .33 .18 .20 (.03)
---------------------------------------------------------------------------------------------
Total from investment
operations .93 .65 .94 .11 .66 1.36 1.00 .89 .98 .75
---------------------------------------------------------------------------------------------
Less distributions from net
investment income (.64) (.65) (.65) (.64) (.67) (.69) (.78) (.79) (.79) (.77)
---------------------------------------------------------------------------------------------
Net asset value,
end of year $11.61 $11.32 $11.32 $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39
=============================================================================================
Total return* 8.46% 5.94% 8.75% 1.14% 5.63% 12.61% 9.49% 8.50% 9.41% 7.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $134,922 $112,981 $107,461 $104,980 $115,971 $95,368 $72,923 $35,862 $17,696 $4,257
Ratios to average net assets:
Expenses .76% .76% .78% .75% .68% .70% .70% .56% .04% -%
Expenses excluding waiver
and payments by affiliate .76% .76% .78% .75% .68% .70% .70% .72% .70% .73%
Net investment income 5.50% 5.76% 5.89% 5.98% 5.70% 6.18% 6.33% 6.60% 7.10% 7.33%
Portfolio turnover rate 15.26% 13.68% 5.23% 32.28% 17.63% 23.37% 10.51% 0.76% 16.65% 5.91%
</TABLE>
<TABLE>
<CAPTION>
LOUISIANA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.37 $11.37 $11.01
--------------------------------------------
Income from investment operations:
Net investment income .57 .58 .49
Net realized & unrealized gains .32 - .35
--------------------------------------------
Total from investment operations .89 .58 .84
--------------------------------------------
Less distributions from net investment income (.58) (.58) (.48)
--------------------------------------------
Net asset value, end of year $11.68 $11.37 $11.37
============================================
Total return* 8.02% 5.27% 7.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $4,469 $3,004 $1,438
Ratios to average net assets:
Expenses 1.32% 1.33% 1.35%**
Net investment income 4.95% 5.29% 5.27%**
Portfolio turnover rate 15.26% 13.68% 5.23%
</TABLE>
<TABLE>
<CAPTION>
MARYLAND FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 19893
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.33 $11.38 $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07 $10.00
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .59 .61 .62 .63 .64 .65 .64 .68 .72 .18
Net realized & unrealized
gains (losses) .32 (.03) .47 (.45) .09 .67 .30 .10 .19 (.05)
----------------------------------------------------------------------------------------------
Total from investment
operations .91 .58 1.09 .18 .73 1.32 .94 .78 .91 .13
----------------------------------------------------------------------------------------------
Less distributions from net
investment income (.60)4 (.63) (.63) (.62) (.64) (.65) (.71) (.72) (.67) (.06)
----------------------------------------------------------------------------------------------
Net asset value,
end of year $11.64 $11.33 $11.38 $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07
==============================================================================================
Total return* 8.27% 5.24% 10.18% 1.78% 6.40% 12.64% 9.21% 7.57% 9.01% 2.98%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $213,005 $185,234 $175,078 $153,145 $156,683 $115,873 $71,538 $33,421 $14,004 $3,313
Ratios to average net assets:
Expenses .74% .73% .74% .73% .66% .71% .71% .54% .07% -%
Expenses excluding waiver
and payments by affiliate .74% .73% .74% .73% .66% .71% .71% .73% .73% .65%**
Net investment income 5.20% 5.42% 5.56% 5.86% 5.58% 6.00% 6.15% 6.50% 6.84% 4.26%**
Portfolio turnover rate 3.19% 12.71% 8.11% 20.30% 18.38% 14.73% 16.65% 12.14% 6.03% 11.78%
</TABLE>
<TABLE>
<CAPTION>
MARYLAND FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.40 $11.44 $10.93
-------------------------------------------
Income from investment operations:
Net investment income .54 .55 .47
Net realized & unrealized gains (losses) .31 (.03) .51
-------------------------------------------
Total from investment operations .85 .52 .98
-------------------------------------------
Less distributions from net investment income (.53) (.56) (.47)
-------------------------------------------
Net asset value, end of year $11.72 $11.40 $11.44
===========================================
Total return* 7.70% 4.68% 9.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,515 $5,084 $913
Ratios to average net assets:
Expenses 1.30% 1.27% 1.31%**
Net investment income 4.63% 4.78% 4.95%**
Portfolio turnover rate 3.19% 12.71% 8.11%
</TABLE>
<TABLE>
<CAPTION>
MISSOURI FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.83 $11.94 $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44 $10.35
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .65 .65 .65 .66 .68 .65 .69 .74 .78
Net realized & unrealized
gains (losses) .44 (.07) .49 (.50) .21 .68 .41 .15 .20 .02
----------------------------------------------------------------------------------------------
Total from investment
operations 1.08 .58 1.14 .15 .87 1.36 1.06 .84 .94 .80
----------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.65) (.64) (.65) (.68) (.68) (.73) (.74) (.74) (.71)
Net realized gains (.04) (.04) - - - - - - - -
----------------------------------------------------------------------------------------------
Total distributions (.68) (.69) (.64) (.65) (.68) (.68) (.73) (.74) (.74) (.71)
----------------------------------------------------------------------------------------------
Net asset value,
end of year $12.23 $11.83 $11.94 $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44
==============================================================================================
Total return* 9.43% 5.06% 10.23% 1.44% 7.29% 12.40% 10.04% 7.96% 8.94% 7.74%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year (000's) $308,045 $269,564 $247,522 $227,442 $228,149 $164,122 $110,940 $55,560 $28,479 $7,996
Ratios to average net assets:
Expenses .71% .70% .71% .70% .64% .67% .71% .72% .40% -%
Expenses excluding waiver
and payments by affiliate .71% .70% .71% .70% .64% .67% .71% .72% .72% .77%
Net investment income 5.32% 5.56% 5.58% 5.75% 5.55% 6.03% 6.21% 6.42% 6.66% 7.30%
Portfolio turnover rate 14.30% 21.81% 18.27% 19.84% 11.02% 10.28% 16.40% 40.08% 8.69% 7.15%
</TABLE>
<TABLE>
<CAPTION>
MISSOURI FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.85 $11.97 $11.47
---------------------------------------
Income from investment operations:
Net investment income .58 .57 .48
Net realized & unrealized
gains (losses) .45 (.07) .50
---------------------------------------
Total from investment operations 1.03 .50 .98
---------------------------------------
Less distributions from:
Net investment income (.57) (.58) (.48)
Net realized gains (.04) (.04) -
---------------------------------------
Total distributions (.61) (.62) (.48)
---------------------------------------
Net asset value, end of year $12.27 $11.85 $11.97
=======================================
Total return* 8.96% 4.32% 8.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,045 $4,295 $1,325
Ratios to average net assets:
Expenses 1.27% 1.27% 1.27%**
Net investment income 4.75% 4.92% 4.94%**
Portfolio turnover rate 14.30% 21.81% 18.27%
</TABLE>
<TABLE>
<CAPTION>
NORTH CAROLINA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.73 $11.75 $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55 $10.46
--------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .62 .64 .64 .65 .65 .67 .64 .70 .74 .77
Net realized & unrealized
gains (losses) .38 (.03) .39 (.55) .05 .75 .35 .12 .22 .06
--------------------------------------------------------------------------------------
Total from investment
operations 1.00 .61 1.03 .10 .70 1.42 .99 .82 .96 .83
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.62) (.63) (.65)1 (.65) (.66) (.66) (.73) (.74) (.72) (.72)
Net realized gains - - - - - - - (.01) - (.02)
--------------------------------------------------------------------------------------
Total distributions (.62) (.63) (.65)1 (.65) (.66) (.66) (.73) (.75) (.72) (.74)
--------------------------------------------------------------------------------------
Net asset value,
end of year $12.11 $11.73 $11.75 $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55
======================================================================================
Total return* 8.78% 5.38% 9.28% 1.06% 5.81% 12.97% 9.28% 7.66% 9.06% 7.98%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year (000's) $297,406 $260,979 $247,031 $216,263 $215,540 $156,517 $106,960 $50,328 $24,746 $10,346
Ratios to average net assets:
Expenses .70% .70% .71% .70% .63% .67% .71% .74% .50% -%
Expenses excluding waiver
and payments by affiliate .70% .70% .71% .70% .63% .67% .71% .74% .71% .74%
Net investment income 5.24% 5.47% 5.52% 5.75% 5.44% 5.86% 6.03% 6.37% 6.68% 7.09%
Portfolio turnover rate 9.95% 9.98% 25.19% 25.05% 3.86% 8.48% 3.16% 7.99% 11.80% 12.35%
</TABLE>
<TABLE>
<CAPTION>
NORTH CAROLINA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.79 $11.80 $11.41
----------------------------
Income from investment operations:
Net investment income .56 .57 .49
Net realized & unrealized gains (losses) .39 (.02) .38
----------------------------
Total from investment operations .95 .55 .87
----------------------------
Less distributions from net investment income (.56) (.56) (.48)
----------------------------
Net asset value, end of year $12.18 $11.79 $11.80
============================
Total return* 8.22% 4.83% 7.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $20,043 $9,607 $2,430
Ratios to average net assets:
Expenses 1.26% 1.26% 1.28%**
Net investment income 4.69% 4.85% 4.90%**
Portfolio turnover rate 9.95% 9.98% 25.19%
</TABLE>
<TABLE>
<CAPTION>
TEXAS FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.37 $11.58 $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59 $10.56
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .62 .66 .67 .68 .69 .69 .67 .73 .84 .78
Net realized & unrealized
gains (losses) .36 - .34 (.49) .03 .66 .37 .10 .11 .04
---------------------------------------------------------------------------------------
Total from investment
operations .98 .66 1.01 .19 .72 1.35 1.04 .83 .95 .82
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.63) (.67) (.68) (.66) (.69) (.69) (.78) (.80) (.80) (.79)
In excess of net investment
income (.01) - - - - - - - - -
Net realized gains (.03) (.20) - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.67) (.87) (.68) (.66) (.69) (.69) (.78) (.80) (.80) (.79)
---------------------------------------------------------------------------------------
Net asset value,
end of year $11.68 $11.37 $11.58 $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59
---------------------------------------------------------------------------------------
Total Return* 8.91% 5.91% 9.15% 1.80% 6.09% 12.41% 9.84% 7.81% 8.95% 7.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $130,578 $126,612 $129,702 $130,684 $148,684 $139,389 $123,722 $29,036 $6,094 $2,356
Ratios to average net assets:
Expenses .76% .75% .76% .73% .65% .66% .70% .40% -% -%
Expenses excluding waiver
and payments by affiliate .76% .75% .76% .73% .65% .66% .70% .75% .71% .76%
Net investment income 5.44% 5.70% 5.86% 6.05% 5.85% 6.15% 6.14% 6.46% 7.26% 7.65%
Portfolio turnover rate 34.52% 35.57% 18.38% 6.36% 20.18% 12.33% 6.44% 0.55% 3.53% 6.95%
</TABLE>
<TABLE>
<CAPTION>
TEXAS FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.49 $11.68 $11.27
----------------------------------------
Income from investment operations:
Net investment income .58 .60 .51
Net realized & unrealized
gains .35 .02 .40
----------------------------------------
Total from investment operations .93 .62 .91
----------------------------------------
Less distributions from:
Net investment income (.58)1 (.61) (.50)
Net realized gains (.03) (.20) -
----------------------------------------
Total distributions (.61) (.81) (.50)
----------------------------------------
Net asset value, end of year $11.81 $11.49 $11.68
========================================
Total return* 8.91% 5.48% 8.23%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $2,076 $740 $79
Ratios to average net assets:
Expenses 1.33% 1.32% 1.33%**
Net investment income 4.79% 5.03% 5.23%**
Portfolio turnover rate 34.52% 35.57% 18.38%
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA FUND - CLASS I
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of year $11.65 $11.72 $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43 $10.45
------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .62 .65 .66 .66 .67 .67 .66 .69 .73 .77
Net realized & unrealized
gains (losses) .35 (.07) .38 (.50) .14 .70 .36 .14 .23 (.03)
------------------------------------------------------------------------------------------------
Total from investment
operations .97 .58 1.04 .16 .81 1.37 1.02 .83 .96 .74
------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.64) (.65) (.65) (.68) (.66) (.74) (.76) (.76) (.76)
Net realized gains (.10) (.01) - - - - - - - -
------------------------------------------------------------------------------------------------
Total distributions (.74) (.65) (.65) (.65) (.68) (.66) (.74) (.76) (.76) (.76)
------------------------------------------------------------------------------------------------
Net asset value,
end of year $11.88 $11.65 $11.72 $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43
================================================================================================
Total return* 8.53% 5.15% 9.41% 1.56% 6.80% 12.67% 9.71% 7.82% 9.12% 7.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $332,199 $287,172 $271,396 $255,965 $260,913 $211,171 $152,615 $82,662 $38,572 $13,885
Ratios to average net assets:
Expenses .69% .69% .69% .69% .62% .65% .68% .72% .60% .16%
Expenses excluding waiver
and payments by affiliate .69% .69% .69% .69% .62% .65% .68% .72% .72% .75%
Net investment income 5.29% 5.56% 5.66% 5.86% 5.65% 5.98% 6.17% 6.38% 6.55% 6.89%
Portfolio turnover rate 12.90% 19.25% 12.72% 21.73% 6.86% 5.74% 4.33% 2.56% 1.06% 3.92%
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 1996***
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.71 $11.77 $11.35
---------------------------------------
Income from investment operations:
Net investment income .57 .58 .49
Net realized & unrealized
gains (losses) .34 (.05) .41
------------------------------------
Total from investment operations .91 .53 .90
------------------------------------
Less distributions from:
Net investment income (.57) (.58) (.48)
Net realized gains (.10) (.01) -
-------------------------------------
Total distributions (.67) (.59) (.48)
-------------------------------------
Net asset value, end of year $11.95 $11.71 $11.77
=======================================
Total return* 7.97% 4.61% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $13,186 $6,674 $2,050
Ratios to average net assets:
Expenses 1.25% 1.25% 1.26%**
Net investment income 4.72% 4.94% 5.06%**
Portfolio turnover rate 12.90% 19.25% 12.72%
</TABLE>
1Includes distributions in excess of net investment income in the amount of
$.001.
2For the period September 10, 1991 (effective date) to February 29, 1992.
3For the period October 3, 1988 (effective date) to February 28, 1989.
4Includes distributions in excess of net investment income in the amount of
$.005.
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized, except where indicated. Prior to May 1,
1994, dividends from net investment income were reinvested at the Offering
Price.
**Annualized
***For the period May 1, 1995 (effective date) to February 29, 1996.
HOW DO THE FUNDS INVEST THEIR ASSETS?
A QUICK LOOK AT THE FUNDS
GOAL: High current tax-free income for residents of
the fund's state.
STRATEGY: Invest in investment grade municipal
securities whose interest is free from federal and
state personal income taxes, if any, for residents of
the fund's state.
WHAT IS THE MANAGER'S APPROACH?
Advisers tries to select securities that it believes will provide the best
balance between risk and return within each fund's range of allowable
investments. Advisers considers a number of factors including general market
and economic conditions, and the credit quality of the issuer when selecting
securities for each fund.
To provide tax-free income to shareholders, Advisers typically uses a buy and
hold strategy. This means it holds securities in a fund's portfolio for
income purposes, rather than trading securities for capital gains. Advisers
may sell a security at any time, however, when Advisers believes doing so
could help the fund meet its goals.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses.
Each fund's focus on income does not mean it invests only in the
highest-yielding securities available, or that it can avoid losses of
principal.
WHO MAY WANT TO INVEST?
The funds may be appropriate for investors in higher tax brackets who seek
high current income that is free from federal and state personal income
taxes.
The value of each fund's investments and the income they generate will vary
from day to day, and generally reflect interest rates, market conditions, and
other federal and state political and economic news. When you sell your
shares, they may be worth more or less than what you paid for them. Please
consider your investment goals and tolerance for price fluctuations and risk
when making your investment decision.
THE FUNDS IN MORE DETAIL
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. Each fund
also tries to provide a maximum level of income that is exempt from personal
income taxes, if any, for resident shareholders of the fund's state. These
goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
Municipal securities help the funds meet their investment goals because they
generally pay interest free from federal income tax. Municipal securities
issued by a fund's state or that state's counties, municipalities,
authorities, agencies, or other subdivisions, as well as municipal securities
issued by U.S. territories such as Guam, Puerto Rico, or the Mariana Islands,
also generally pay interest free from state personal income taxes, if any,
for residents of the fund's state.
Each fund normally invests:
o at least 80% of its net assets in securities that pay interest free from
federal income taxes, including the federal alternative minimum tax (this
policy is fundamental);
o at least 80% of its net assets in securities that pay interest free from
the personal income taxes, if any, of its state, although each fund tries
to invest all of its assets in these securities (this policy is also
fundamental); and
o at least 65% of its total assets in municipal securities of its state.
While each fund tries to invest 100% of its assets in tax-free municipal
securities, it is possible, although not anticipated, that a fund may have up
to 20% of its assets in securities that pay taxable interest. If you are
subject to the federal alternative minimum tax, please keep in mind that each
fund may also have a portion of its assets in municipal securities that pay
interest subject to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities
based on their opinion of the issuer's credit quality. Most rating agencies
use a descending alphabet scale to rate long-term securities, and a
descending numerical scale to rate short-term securities. For example, Fitch
and S&P use AAA, AA, A and BBB for their top four long-term ratings, while
Moody's uses Aaa, Aa, A and Baa. Securities rated in the highest rating
category are "top rated." Securities in the top four ratings are "investment
grade," although securities in the fourth highest rating may have some
speculative features. These ratings are described in more detail in the SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
o Each fund only buys investment grade securities or unrated securities that
Advisers believes are comparable.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from less than one year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields.
o The funds have no restrictions on the maturity of the securities they may
buy or on their average portfolio maturity.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either
at specific intervals or whenever a benchmark rate changes. While this
feature helps to protect against a decline in the security's market price, it
also lowers a fund's income when interest rates fall. Of course, a fund's
income from its variable rate investments may also increase if interest rates
rise.
o Each fund may invest in investment grade variable and floating rate
securities.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body
must set aside the money to make the lease payments each year. If the money
is not set aside, the issuer or the lessee can end the lease without penalty.
If the lease is cancelled, investors who own the municipal lease obligations
may not be paid.
o Each fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes unusual or adverse economic,
market or other conditions exist, it may invest a fund's portfolio in a
temporary defensive manner. Under these circumstances, each fund may invest
all of its assets in securities that pay taxable interest, including (i)
municipal securities issued by a state or local government other than the
fund's state, or by a U.S. territory such as Guam, Puerto Rico or the Mariana
Islands; (ii) high quality commercial paper; or (iii) securities issued by or
guaranteed by the full faith and credit of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price
of the security may fluctuate during the time before payment and delivery,
the fund assumes the risk that the value of the security at delivery may be
more or less than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in any one state or type
of project to help spread and reduce the risks of investment. Non-diversified
funds may invest a greater portion of their assets in the securities of one
issuer than diversified funds. Economic, business, political or other changes
can affect all securities of a similar type. A non-diversified fund may be
more sensitive to these changes.
o The Maryland Fund is a non-diversified fund, although it intends to meet
certain diversification requirements for tax purposes. The other funds are
all diversified. Each fund may invest more than 25% of its assets in
municipal securities that finance similar types of projects, such as
hospitals, housing, industrial development, transportation or pollution
control.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about each fund's investment policies,
including those described above, please see "How Do the Funds Invest Their
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, a fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
Like all investments, an investment in a fund involves risks. The risks of
each fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in the funds may
involve more risk than an investment in a fund that does not focus on
securities of a single state. Because each fund holds many securities, it is
likely to be less risky than any one, or few, directly held municipal
investments.
GENERAL RISK. There is no assurance that a fund will meet its investment
goal. A fund's share price, and the value of your investment, may change.
Generally, when the value of a fund's investments go down, so does the fund's
share price. Similarly, when the value of a fund's investments go up, so does
the fund's share price. Since the value of a fund's shares can go up or down,
it is possible to lose money by investing in a fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices
fall. The opposite is also true: municipal security prices go up when
interest rates fall. To explain why this is so, assume you hold a municipal
security offering a 5% yield. A year later, interest rates are on the rise
and comparable securities are offered with a 6% yield. With higher-yielding
securities available, you would have trouble selling your 5% security for the
price you paid - causing you to lower your asking price. On the other hand,
if interest rates were falling and 4% municipal securities were being
offered, you would be able to sell your 5% security for more than you paid.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. Changes in the credit quality of the credit provider could
affect the value of the security and the fund's share price.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, a fund may have to replace it with a
lower-yielding security.
STATE RISKS. Since each fund invests heavily in municipal securities of its
state, events in that state are likely to affect the fund's investments and
its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to municipal issuers.
A negative change in any one of these or other areas could affect the ability
of a state's municipal issuers to meet their obligations. It is important to
remember that economic, budget and other conditions within a state are
unpredictable and can change at any time. For more specific information on
the economy and financial strength of the funds' various states, please see
"What Are the Risks of Investing in the Funds?" in the SAI.
U.S. TERRITORIES RISKS. Each fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories such as Guam, Puerto Rico or
the Mariana Islands. As with state municipal securities, events in any of
these territories where a fund invests may affect the fund's investments and
its performance.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
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 each 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 $232 billion in assets,
including $48 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
funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been an analyst or portfolio manager for each of the funds
since their inception. 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 securities
industry-related committees and associations.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been an analyst or portfolio manager for the Alabama, Georgia
and Maryland funds since 1989. Mr. Pomeroy 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 an analyst or portfolio manager for the Florida, Louisiana,
Maryland, North Carolina, Texas and Virginia funds since their inception. 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
He has been an analyst or portfolio manager for the Louisiana and Texas funds
since 1991. Mr. Wiley 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.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been an analyst or portfolio manager for 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.
Ben Barber
Portfolio Manager of Advisers
Mr. Barber has been an analyst or portfolio manager for the Missouri and
Alabama funds since 1993. He has a Bachelor of Arts Degree in International
Relations and Political Science from the University of California at Santa
Barbara. Mr. Barber joined the Franklin Templeton Group in 1991. He is a
member of several securities industry-related committees and associations.
Mark Orsi
Portfolio Manager of Advisers
Mr. Orsi has been an analyst or portfolio manager for the Kentucky, Georgia,
North Carolina and Virginia funds since 1991. He holds a Bachelor of Science
degree in Finance from Santa Clara University. Mr. Orsi joined the Franklin
Templeton Group in 1990. He is a member of several securities
industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1998, management
fees paid to Advisers and total operating expenses, as a percentage of
average monthly net assets, were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
- ----------------------------------------------------------------------
Alabama Fund 0.56% 0.72% 1.28%
Florida Fund 0.47% 0.61% 1.17%
Georgia Fund 0.59% 0.76% 1.32%
Kentucky Fund 0.17%* 0.35%* -
Louisiana Fund 0.60% 0.76% 1.32%
Maryland Fund 0.56% 0.74% 1.30%
Missouri Fund 0.54% 0.71% 1.27%
North Carolina Fund 0.54% 0.70% 1.26%
Texas Fund 0.60% 0.76% 1.33%
Virginia Fund 0.53% 0.69% 1.25%
*Management fees, before any advance waiver, totaled 0.63%. 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
Do the Funds Buy Securities for Their Portfolios?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for each fund. During
the fiscal year ended February 28, 1998, administration fees paid to FT
Services, as a percentage of average daily net assets, were as follows:
ADMINISTRATION FEES
Alabama Fund ............................... 0.15%
Florida Fund ............................... 0.11%
Georgia Fund ............................... 0.15%
Kentucky Fund .............................. 0.15%
Louisiana Fund ............................. 0.15%
Maryland Fund .............................. 0.15%
Missouri Fund .............................. 0.15%
North Carolina Fund ........................ 0.15%
Texas Fund ................................. 0.15%
Virginia Fund .............................. 0.14%
These fees are paid by Advisers. They are not a separate expense of the
funds. Please see "Investment Management and Other Services" in the SAI for
more information.
THE RULE 12B-1 PLANS
Each fund and class 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. 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 funds under their Class I plans 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, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plans, a 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, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
A 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 plans. 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
Funds' Underwriter" in the SAI.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the funds advertise their performance. Commonly used
measures of performance include total return, current yield and current
distribution rate. Each fund 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 fund will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how each fund calculates its performance figures,
please see "How Do the Funds Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES TO THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
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TAXATION OF THE FUNDS' INVESTMENTS. Each HOW DO THE FUNDS EARN INCOME AND GAINS?
fund invests your money in municipal and Each fund earns interest and other income
other securities described in the section (the fund's "income") on its investments.
"How Do the Funds Invest Their Assets?" When a fund sells a security for a price that
Special tax rules may apply when is higher than it paid, it has a gain. When a
determining the income and gains that each fund sells a security for a price that is
fund earns on its investments. These rules lower than it paid, it has a loss. If a fund
may, in turn, affect the amount of has held the security for more than one year,
distributions that a fund pays to you. the gain or loss will be a long-term capital
These special tax rules are discussed in gain or loss. If a fund has held the security
the SAI. for one year or less, the gain or loss will
be a short-term capital gain or loss. A
TAXATION OF THE FUNDS. As a regulated fund's gains and losses are netted together,
investment company, each fund generally and, if the fund has a net gain (the fund's
pays no federal income tax on the income "gains"), that gain will generally be
and gains that it distributes to you. distributed to you.
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TAXATION OF SHAREHOLDERS
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DISTRIBUTIONS. Distributions made to you WHAT IS A DISTRIBUTION?
from interest income on municipal As a shareholder, you will receive
securities will be exempt from the regular your share of a fund's income and gains on
federal income tax. Distributions made to its investments. A fund's interest income on
you from other income on temporary municipal securities is paid to you as
investments, short-term capital gains, or exempt-interest dividends. A fund's ordinary
ordinary income from the sale of market income and short term capital gains are paid
discount bonds will be taxable to you as to you as ordinary dividends. A fund's
ordinary dividends, whether you receive long-term capital gains are paid to you as
them in cash or in additional shares. capital gain distributions. If a fund pays
Distributions made to you from interest on you an amount in excess of its income and
certain private activity bonds, while gains, this excess will generally be treated
still exempt from the regular federal as a non-taxable distribution. These amounts,
income tax, are a preference item when taken together, are what we call a fund's
determining your alternative minimum tax. distributions to you.
The fund will send you a statement in -----------------------------------------------
January of the current year that reflects
the amount of exempt-interest dividends,
ordinary dividends, capital gain
distributions, interest income that is a
tax preference item under the alternative
minimum tax and non-taxable distributions
you received from the fund in the prior
year. This statement will include
distributions declared in December and
paid to you in January of the current
year, but which are taxable as if paid on
December 31 of the prior year. The IRS
requires you to report these amounts on
your income tax return for the prior year.
A fund's statement for the prior year will
tell you how much of your capital gain
distribution represents 28% rate gain.
The remainder of the capital gain
distribution represents 20% rate gain.
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DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the funds'
distributions will qualify for the corporate dividends-received deduction.
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REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the fund of
in the funds for shares in another some or all of your shares in the fund. The
Franklin Templeton Fund, you will price per share you receive when you redeem
generally have a gain or loss that the IRS fund shares may be more or less than the
requires you to report on your income tax price at which you purchased those shares. An
return. If you exchange fund shares held exchange of shares in the fund for shares of
for 90 days or less and pay no sales another Franklin Templeton Fund is treated as
charge, or a reduced sales charge, for the a redemption of fund shares and then a
new shares, all or a portion of the sales purchase of shares of the other fund. When
charge you paid on the purchase of the you redeem or exchange your shares, you will
shares you exchanged is not included in generally have a gain or loss, depending upon
their cost for purposes of computing gain whether the amount you receive for your
or loss on the exchange. If you hold your shares is more or less than your cost or
shares for six months or less, any loss other basis in the shares. Please call Fund
you have will be disallowed to the extent Information for a free shareholder Tax
of any exempt-interest dividends paid on Information Handbook if you need more
your shares. Any such loss not disallowed information on calculating the gain or loss
will be treated as a long-term capital on the redemption or exchange of your shares.
loss to the extent of any long-term -----------------------------------------------
capital gain distributions paid on your
shares. All or a portion of any loss on
the redemption or exchange of your shares
will be disallowed by the IRS if you buy
other shares in the fund within 30 days
before or after your redemption or
exchange.
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STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the funds, and gains arising from redemptions or exchanges of your fund
shares, will generally be subject to state and local income tax. Distributions
paid from the interest earned on municipal securities of a state, or its
political subdivisions, will generally be exempt from that state's personal
income taxes. Dividends paid from interest earned on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands and Guam) will also be exempt from that state's personal income taxes. A
state does not, however, grant tax-free treatment to interest on investments in
municipal securities of other states. Corporate taxpayers subject to a state's
corporate income or franchise tax may be subject to special rules. The holding
of fund shares may also be subject to state and local intangibles taxes. Each
fund in which you are a shareholder will provide you with information at the end
of each calendar year on the amounts of such dividends that may qualify for
exemption from reporting on your individual income tax returns. You may wish to
contact your tax advisor to determine the state and local tax consequences of
your investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS. Exempt-interest dividends paid
to you, although exempt from the regular federal income tax, are includible in
the tax base for determining the taxable portion of your social security or
railroad retirement benefits. The IRS requires you to disclose these
exempt-interest dividends on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends,
exempt-interest dividends, capital gain distributions and gains arising from
redemptions or exchanges of your fund shares. Fund shares held by the estate of
a non-U.S. investor may be subject to U.S. estate tax. You may wish to contact
your tax advisor to determine the U.S. and non-U.S. tax consequences of your
investment in a fund.
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BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when a fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding by
subject to backup withholding under IRS providing the fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
IRS requires the fund to withhold 31% of to sign when you opened your account.
all the distributions (including ordinary However, if the IRS instructs the fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the fund with your
fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the fund to do so. The fund fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem your -----------------------------------------------
shares at the current Net Asset Value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
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THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" AND "APPENDICES - STATE TAX TREATMENT"
IN THE SAI. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS,
FOREIGN TAXES PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE
FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING
FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The funds are series of the Franklin Tax-Free Trust (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, each fund offers 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,
and 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, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUNDS DO NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges
now, you can avoid the delay and inconvenience of having to send an
additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It is important that
we receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.
4. Make your investment using the table below.
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METHOD STEPS TO FOLLOW
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BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
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BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
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THROUGH YOUR DEALER Call your investment representative
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CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
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o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
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 TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
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CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.15% 2.20% 2.00%
$1,000,000
$1,000,000 or more* None None None
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 "Choosing a Share
Class."
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. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the SAME CLASS of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in Class I shares of
the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the SAME CLASS of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of fund shares and a new Contingency Period
will begin. We will, however, credit your fund account with additional
shares based on the Contingent Deferred Sales Charge you paid and the
amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. 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 goal
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.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
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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.
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THROUGH YOUR DEALER Call your investment representative
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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, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge 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. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"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 funds do 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 funds, such as "Advisor Class" or "Class Z" shares. Because
the funds do not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of a 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 a fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions. 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.
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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.
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THROUGH YOUR DEALER Call your investment representative
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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 funds are not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 until your check or draft has cleared, which may
take seven business days or more. 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 Account fees
o Redemptions by a 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 FUNDS?
Each 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.
The funds declare dividends from their net investment income daily and pay
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 each class.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR SHARES.
If you buy shares shortly before the fund deducts a capital gain distribution
from its Net Asset Value, please keep in mind that you will receive a portion
of the price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from a 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 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 - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
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
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
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.
HOW AND WHEN SHARES ARE PRICED
The funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price 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. Each
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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. 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.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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 told us that you do not want telephone privileges to apply to
your account.
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 a fund.
Under the plan, you can have money transferred automatically from your
checking account to a 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 a 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 a 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. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
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 by
mail or by phone 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 a 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
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
MARYLAND FUND 169 269
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 funds 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 funds' financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds 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 funds 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 funds, 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 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 funds' 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. The holding period for Class I begins on the
first day of the month in which you buy shares. Regardless of when during the
month you buy Class I shares, they will age one month on the last day of that
month and each following month. The holding period for Class II begins on the
day you buy your shares. For example, if you buy Class II shares on the 18th
of the month, they will age one month on the 18th day of the next 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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.
PROSPECTUS & APPLICATION
FRANKLIN TAX-FREE TRUST
FRANKLIN ARIZONA TAX-FREE INCOME FUND
FRANKLIN COLORADO TAX-FREE INCOME FUND
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
FRANKLIN HIGH YIELD 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
JULY 1, 1998
INVESTMENT STRATEGY: TAX-FREE INCOME
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated July 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE 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 RISKS OF INVESTING IN THE FUNDS?"
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, 1998
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 FUNDS
Expense Summary..........................................
Financial Highlights.....................................
How Do the Funds Invest Their Assets?....................
What Are the Risks of Investing in the Funds?............
Who Manages the Funds?...................................
How Do the Funds Measure Performance?....................
How Taxation Affects the Funds and Their Shareholders?...
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?............................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Funds?.......
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings..........................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a
fund. It is based on the historical expenses of each fund for the fiscal year
ended February 28, 1998. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
COLO CONNEC- FEDERAL HIGH NEW PENN- PUERTO
ARIZONA RADO TICUT INTERMEDIATE YIELD INDIANA MICHIGAN JERSEY OREGON SYLVANIA RICO
FUND 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> <C>
Maximum Sales Charge (as a
percentage of Offering Price) 4.25% 4.25% 4.25% 2.25% 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% 2.25% 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 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% 0.55% 0.57% 0.61%* 0.46% 0.63% 0.65%* 0.49% 0.51% 0.49% 0.56%
Rule 12b-1 Fees*** 0.09% 0.09% 0.09% 0.10% 0.08% 0.09% 0.10% 0.09% 0.09% 0.09% 0.09%
Other Expenses 0.06% 0.07% 0.07% 0.11% 0.07% 0.10% 0.26% 0.08% 0.07% 0.07% 0.10%
---------------------------------------------------------------------------------------------------------
Total Fund
Operating Expenses 0.63% 0.71% 0.73% 0.82%* 0.61% 0.82% 1.01%* 0.66% 0.67% 0.65% 0.75%
=========================================================================================================
CLASS II
Management Fees 0.48% 0.55% 0.57% - 0.46% - - 0.49% 0.51% 0.49% 0.56%
Rule 12b-1 Fees*** 0.65% 0.65% 0.65% - 0.65% - - 0.65% 0.64% 0.65% 0.65%
Other Expenses 0.06% 0.07% 0.07% - 0.07% - - 0.08% 0.07% 0.07% 0.10%
---------------------------------------------------------------------------------------------------------
Total Fund
Operating Expenses 1.19% 1.27% 1.29% - 1.18% - - 1.22%** 1.22% 1.21% 1.31%
=========================================================================================================
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 a fund.
CONNEC- FEDERAL HIGH NEW PENN- PUERTO
ARIZONA COLORADO TICUT INTERMEDIATE YIELD INDIANA MICHIGAN JERSEY OREGON SYLVANIA RICO
FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND FUND
CLASS I
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year**** $ 49 $ 49 $ 50 $31 $ 48 $ 51 $52 $ 49 $ 49 $ 49 $ 50
3 Years $ 62 $ 64 $ 65 $48 $ 61 $ 68 $73 $ 63 $ 63 $ 62 $ 65
5 Years $ 76 $ 80 $ 81 $67 $ 75 $ 86 $96 $ 78 $ 78 $ 77 $ 82
10 Years $118 $127 $129 $122 $115 $140 $161 $121 $122 $120 $132
CLASS II
1 Year $ 32 $ 33 $ 33 - $ 32 - - $ 32 $ 32 $ 32 $ 33
3 Years $ 47 $ 50 $ 50 - $ 47 - - $ 48 $ 48 $ 48 $ 51
5 Years $ 75 $ 79 $ 80 - $ 74 - - $ 76 $ 76 $ 76 $ 81
10 Years $153 $162 $164 - $152 - - $156 $156 $155 $166
</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.
Each 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.
+++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? - Choosing a Share Class."
++++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
you would pay is the same. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for details.
*For the period shown, Advisers had agreed in advance to waive or limit its
management fees and make certain payments to reduce the fund's expenses. With
this reduction, the management fees were 0.54% for the Federal Intermediate
Fund and 0% for the Michigan Fund. Total operating expenses were 0.75% for
the Federal Intermediate Fund and 0.25% for the Michigan Fund.
**Due to rounding, Class II total fund operating expenses are different than
the ratio of expenses to average net assets shown under "Financial
Highlights."
***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 each fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the funds' 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, 1998. The Annual Report to Shareholders also
includes more information about each fund's performance. For a free copy,
please call Fund Information.
<TABLE>
<CAPTION>
ARIZONA FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.24 $11.34 $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37 $10.41
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .61 .62 .64 .65 .66 .68 .67 .70 .71 .75
Net realized and unrealized gains (losses) .29 (.04) .36 (.48) .02 .73 .31 .13 .20 (.04)
----------------------------------------------------------------------------------------
Total from investment operations .90 .58 1.00 .17 .68 1.41 .98 .83 .91 .71
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.61) (.63) (.65) (.64) (.67) (.66) (.73) (.77) (.77) (.75)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains (.08) (.05) (.12) - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.70) (.68) (.77) (.64) (.67) (.66) (.73) (.77) (.77) (.75)
----------------------------------------------------------------------------------------
Net asset value, end of year $11.44 $11.24 $11.34 $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37
========================================================================================
Total return* 8.23% 5.33% 9.24% 1.63% 5.76% 13.22% 9.45% 7.92% 8.70% 6.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $810,250 $752,335 $750,797 $720,801 $796,838 $707,702 $585,986 $412,912 $214,606 $65,710
Ratios to average net assets:
Expenses .63% .62% .62% .60% .54% .55% .56% .59% .68% .51%
Expenses excluding waiver and payments
and payments by affiliate .63% .62% .62% .60% .54% .55% .56% .59% .68% .73%
Net investment income 5.40% 5.59% 5.67% 5.86% 5.65% 6.11% 6.37% 6.58% 6.53% 6.58%
Portfolio turnover rate 20.02% 16.57% 25.12% 18.65% 14.17% 5.67% 1.56% 4.13% 20.82% 26.64%
</TABLE>
ARIZONA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.30 $11.38 $11.15
--------------------------
Income from investment operations:
Net investment income .56 .57 .49
Net realized and unrealized gains (losses) .29 (.03) .34
--------------------------
Total from investment operations .85 .54 .83
--------------------------
Less distributions from:
Net investment income (.56) (.57) (.48)
Net realized gains (.08) (.05) (.12)
--------------------------
Total distributions (.64) (.62) (.60)
--------------------------
Net asset value, end of year $11.51 $11.30 $11.38
==========================
Total return* 7.67% 4.89% 7.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $14,537 $5,486 $1,892
Ratios to average net assets:
Expenses 1.19% 1.19% 1.20%**
Net investment income 4.82% 5.01% 5.05%**
Portfolio turnover rate 20.02% 16.57% 25.12%
<TABLE>
<CAPTION>
COLORADO FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.80 $11.84 $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53 $10.40
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .66 .67 .67 .68 .70 .68 .70 .73 .79
Net realized and unrealized gains (losses) .39 (.04) .45 (.57) .10 .85 .36 .06 .20 .08
---------------------------------------------------------------------------------------
Total from investment operations 1.02 .62 1.12 .10 .78 1.55 1.04 .76 .96 .87
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.66) (.66) (.66) (.69) (.70) (.74) (.76) (.76) (.74)
Net realized gains (.07) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.71) (.66) (.66) (.66) (.69) (.70) (.74) (.76) (.76) (.74)
---------------------------------------------------------------------------------------
Net asset value, end of period $12.11 $11.80 $11.84 $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53
=======================================================================================
Total return* 8.86% 5.44% 10.12% 1.05% 6.49% 14.26% 9.93% 7.07% 8.76% 8.41%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $266,599 $236,609 $215,609 $194,564 $202,158 $159,280 $110,085 $69,715 $38,315 $11,026
Ratios to average net assets:
Expenses .71% .71% .71% .70% .64% .67% .70% .74% .56% -%
Expenses excluding waiver
and payments by affiliate .71% .71% .71% .70% .64% .67% .70% .74% .72% .74%
Net investment income 5.28% 5.59% 5.73% 5.94% 5.69% 6.20% 6.44% 6.54% 6.63% 7.25%
Portfolio turnover rate 22.97% 14.13% 17.58% 28.83% 10.85% 5.66% 21.46% 17.72% .82% 7.83%
</TABLE>
COLORADO FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.84 $11.87 $11.40
-----------------------------
Income from investment operations:
Net investment income .57 .59 .50
Net realized and unrealized gains (losses) .40 (.02) .46
-----------------------------
Total from investment operations .97 .57 .96
-----------------------------
Less distributions from:
Net investment income (.57) (.60) (.49)
Net realized gains (.07) - -
-----------------------------
Total distributions (.64) (.60) (.49)
-----------------------------
Net asset value, end of year $12.17 $11.84 $11.87
=============================
Total return* 8.39% 4.93% 8.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,855 $5,654 $1,656
Ratios to average net assets:
Expenses 1.27% 1.28% 1.29%**
Net investment income 4.72% 4.99% 5.12%**
Portfolio turnover rate 22.97% 14.13% 17.58%
<TABLE>
<CAPTION>
CONNECTICUT FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 19892
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of period $10.92 $10.96 $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16 $10.00
-------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .60 .61 .62 .62 .62 .64 .62 .64 .70 .20
Net realized and unrealized gains (losses) .32 (.02) .32 (.60) .08 .66 .21 .02 .18 .02
-------------------------------------------------------------------------------------------
Total from investment operations .92 .59 .94 .02 .70 1.30 .83 .66 .88 .22
-------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.60) (.63) (.62) (.61) (.63) (.63) (.68) (.68) (.68) (.06)
In excess of net investment income (.01) - - - - - - - - -
-------------------------------------------------------------------------------------------
Total distributions (.61) (.63) (.62) (.61) (.63) (.63) (.68) (.68) (.68) (.06)
-------------------------------------------------------------------------------------------
Net asset value, end of year $11.23 $10.92 $10.96 $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16
===========================================================================================
Total return* 8.62% 5.52% 9.04% .37% 6.16% 12.60% 8.16% 6.39% 8.65% 5.16%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) 203,643 $183,649 $167,045 $15,5623 $163,050 $126,816 $88,184 $48,035 $22,793 $5,637
Ratio to average net assets:
Expenses .73% .72% .73% .71% .65% .69% .71% .71% .36% -%
Expenses excluding waiver
and payments by affiliate .73% .72% .73% .71% .65% .69% .71% .72% .72% .65%**
Net investment income 5.41% 5.62% 5.70% 5.83% 5.54% 5.97% 6.11% 6.10% 6.37% 4.68%**
Portfolio turnover rate 18.54% 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 1998 1997 19961
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.94 $10.97 $10.65
------------------------------
Income from investment operations:
Net investment income .55 .60 .47
Net realized and unrealized gains (losses) .31 (.07) .31
------------------------------
Total from investment operations .86 .53 .78
------------------------------
Less distributions from:
Net investment income (.54) (.56) (.46)
------------------------------
Net asset value, end of year $11.26 $10.94 $10.97
==============================
Total return* 8.08% 5.03% 7.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $8,636 $4,149 $1,656
Ratios to average net assets:
Expenses 1.29% 1.29% 1.30%**
Net investment income 4.85% 5.01% 5.12%**
Portfolio turnover rate 18.54% 14.53% 3.88%
FEDERAL INTERMEDIATE FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEBRUARY 28, 1998 1997 1996 1995 1994 19935
- -----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.94 $10.95 $10.48 $10.80 $10.54 $10.00
---------------------------------------------------------
Income from investment operations:
Net investment income .53 .55 .55 .54 .52 .14
Net realized and unrealized gains (losses) .33 (.01) .47 (.33) .29 .50
---------------------------------------------------------
Total from investment operations .86 .54 1.02 .21 .81 .64
---------------------------------------------------------
Less distributions from:
Net investment income (.55) (.55) (.55) (.53) (.55) (.10)
---------------------------------------------------------
Net asset value, end of year $11.25 $10.94 $10.95 $10.48 $10.80 $10.54
=========================================================
Total return* 8.02% 5.12% 9.93% (.20%) 7.82% 14.77%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $139,545 $104,715 $85,967 $73,977 $67,603 $9,192
Ratios to average net assets:
Expenses .75% .68% .65% .56% .30% -
Expenses excluding waiver and payments by affiliate .82% .84% .85% .84% .89% 1.60%**
Net investment income 4.83% 5.16% 5.12% 5.25% 4.93% 5.49%**
Portfolio turnover rate 23.32% 22.54% 3.35% 38.46% 28.76% 22.54%
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.21 $11.19 $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50 $10.34
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .69 .71 .74 .74 .76 .79 .78 .82 .81 .79
Net realized and unrealized gains (losses) .47 .04 .45 (.51) .17 .62 .23 (.21) .12 .24
----------------------------------------------------------------------------------------
Total from investment operations 1.16 .75 1.19 .23 .93 1.41 1.01 .61 .93 1.03
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.68) (.73)+++ (.74) (.74) (.78) (.78) (.84) (.84) (.89) (.87)
In excess of net investment income (.01) - - - - (.01) - - - -
----------------------------------------------------------------------------------------
Total distributions (.69) (.73) (.74) (.74) (.78) (.79) (.84) (.84) (.89) (.87)
----------------------------------------------------------------------------------------
Net asset value, end of year $11.68 $11.21 $11.19 $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50
========================================================================================
Total return* 10.64% 7.01% 11.35% 2.28% 8.33% 13.72% 9.97% 5.71% 8.80% 10.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $5,743 $4,505 $3,787 $3,287 $3,373 $2,743 $2,110 $1,718 $1,575 $746
Ratios to average net assets:
Expenses .61% .62% .61% .60% .53% .54% .53% .52% .54% .61%
Net investment income 5.98% 6.41% 6.68% 6.92% 6.79% 7.45% 7.73% 7.90% 7.52% 7.68%
Portfolio turnover rate 15.84% 6.98% 9.23% 15.89% 16.09% 33.46% 102.57% 70.60% 23.41% 2.02%
</TABLE>
HIGH YIELD FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.26 $11.24 $10.81
-----------------------------
Income from investment operations:
Net investment income .63 .66 .56
Net realized and unrealized gains .48 .03 .42
----------------------------
Total from investment operations 1.11 .69 .98
----------------------------
Less distributions from:
Net investment income (.62) (.67)++++ (.55)
----------------------------
Net asset value, end of year $11.75 $11.26 $11.24
============================
Total return* 10.15% 6.36% 9.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $423,264 $194,400 $48,163
Ratios to average net assets:
Expenses 1.18% 1.18% 1.18%**
Net investment income 5.38% 5.78% 6.07%**
Portfolio turnover rate 15.84% 6.98% 9.23%
<TABLE>
<CAPTION>
INDIANA FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
PER A SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.77 $11.76 $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49 $10.47
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .65 .66 .67 .66 .68 .71 .69 .74 .80 .79
Net realized and unrealized gains (losses) .32 .01 .35 (.61) .11 .83 .33 .10 .24 (.01)
---------------------------------------------------------------------------------------
Total from investment operations .97 .67 1.02 .05 .79 1.54 1.02 .84 1.04 .78
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.65) (.66) (.66) (.66) (.68) (.71) (.78) (.78) (.76) (.76)
Net realized gains (.02) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.67) (.66) (.66) (.66) (.68) (.71) (.78) (.78) (.76) (.76)
---------------------------------------------------------------------------------------
Net asset value, end of year $12.07 $11.77 $11.76 $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49
=======================================================================================
Total return* 8.52% 5.91% 9.20% .58% 6.53% 14.10% 9.53% 7.78% 9.86% 7.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $54,643 $51,137 $48,949 $46,583 $47,870 $37,367 $23,914 $14,946 $11,310 $5,875
Ratios to average net assets:
Expenses .82% .82% .80% .81% .71% .59% .50% .51% .06% -%
Expenses excluding waiver
and payments by affiliate .82% .82% .80% .81% .71% .73% .74% .74% .70% .77%
Net investment income 5.45% 5.69% 5.80% 5.84% 5.62% 6.16% 6.60% 6.91% 7.34% 7.41%
Portfolio turnover rate 24.08% 23.54% 10.56% 26.49% 16.12% 7.98% .03% 24.60% .06% 10.67%
</TABLE>
MICHIGAN FUND
YEAR ENDED FEB. 28 1998 19973
- --------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.42 $10.00
----------------
Income from investment operations:
Net investment income .51 .30
Net realized and unrealized gains .67 .32
----------------
Total from investment operations 1.18 .62
----------------
Less distributions from:
Net investment income (.58) (.20)
----------------
Net asset value, end of year $11.02 $10.42
================
Total return* 11.62% 6.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $9,268 $3,884
Ratios to average net assets:
Expenses .25% .34%**
Expenses excluding waiver
and payments by affiliate 1.01% 1.21%**
Net investment income 5.39% 4.90%**
Portfolio turnover rate 51.81% 42.83%
NEW JERSEY FUND - CLASS I
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 19894
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.61 $11.68 $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52 $10.00
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .63 .64 .65 .66 .67 .69 .68 .69 .71 .58
Net realized and unrealized gains (losses) .32 (.06) .39 (.55) (.02) .69 .35 .24 .23 .32
----------------------------------------------------------------------------------------
Total from investment operations .95 .58 1.04 .11 .65 1.38 1.03 .93 .94 .90
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.65) (.64) (.65) (.68) (.69) (.71) (.77) (.78) (.38)
----------------------------------------------------------------------------------------
Net asset value, end of year $11.92 $11.61 $11.68 $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52
========================================================================================
Total return* 8.37% 5.13% 9.43% 1.12% 5.39% 12.55% 9.65% 8.79% 8.87% 11.20%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $636,929 $574,691 $564,864 $533,937 $561,130 $433,702 $332,536 $258,514 $99,299 $19,973
Ratios to average net assets:
Expenses .66% .64% .65% .63% .57% .59% .60% .65% .73% .25%
Expenses excluding waiver
and payments by affiliate .66% .64% .65% .63% .57% .59% .60% .65% .73% .66%**
Net investment income 5.34% 5.58% 5.65% 5.86% 5.60% 6.06% 6.30% 6.40% 6.41% 6.09%**
Portfolio turnover rate 12.77% 8.87% 12.04% 31.05% 4.16% 14.12% 3.66% 1.84% 10.86% 7.44%
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY FUND - CLASS II
<S> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 19961
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.66 $11.72 $11.30
--------------------------
Income from investment operations:
Net investment income .56 .57 .49
Net realized and unrealized gains (losses) .33 (.05) .40
--------------------------
Total from investment operations .89 .52 .89
--------------------------
Less distributions from:
Net investment income (.57) (.58) (.47)
---------------------------
Net asset value, end of year $11.98 $11.66 $11.72
===========================
Total return* 7.84% 4.57% 8.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $28,139 $13,095 $4,542
Ratios to average net assets:
Expenses 1.21% 1.21% 1.23%**
Net investment income 4.77% 5.01% 5.15%**
Portfolio turnover rate 12.77% 8.87% 12.04%
</TABLE>
<TABLE>
<CAPTION>
OREGON FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.55 $11.60 $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44 $10.37
----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .62 .63 .63 .63 .64 .66 .63 .68 .69 .72
Net realized and unrealized gains (losses) .31 (.05) .38 (.49) (.02) .70 .38 .15 .17 .05
----------------------------------------------------------------------------------------
Total from investment operations .93 .58 1.01 .14 .62 1.36 1.01 .83 .86 .77
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.62) (.63) (.63) (.62) (.65) (.65) (.70) (.71) (.71) (.70)
----------------------------------------------------------------------------------------
Net asset value, end of year $11.86 $11.55 $11.60 $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44
========================================================================================
Total return* 8.21% 5.13% 9.19% 1.36% 5.15% 12.52% 9.61% 7.87% 8.11% 7.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $427,022 $384,003 $375,415 $349,458 $3765,684 $303,719 $208,972 $123,486 $73,798 $24,453
Ratios to average net assets:
Expenses .67% .66% .66% .65% .58% .62% .65% .70% .70% .45%
Expenses excluding waiver
and payments by affliate .67% .66% .66% .65% .58% .62% .65% .70% .70% .73%
Net investment income 5.33% 5.52% 5.51% 5.71% 5.47% 5.87% 6.09% 6.40% 6.28% 6.72%
Portfolio turnover rate 12.18% 4.47% 6.52% 26.44% 9.42% 7.78% 4.65% 10.74% 12.58% 15.08%
</TABLE>
OREGON FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.61 $11.65 $11.23
-----------------------------
Income from investment operations:
Net investment income .56 .56 .47
Net realized and unrealized gains (losses) .31 (.04) .41
-----------------------------
Total from investment operations .87 .52 .88
-----------------------------
Less distributions from:
Net investment income (.56) (.56) (.46)
-----------------------------
Net asset value, end of year $11.92 $11.61 $11.65
=============================
Total return* 7.66% 4.59% 7.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $15,946 $7,100 $2,044
Ratios to average net assets:
Expenses 1.22% 1.23% 1.24%**
Net investment income 4.74% 4.93% 4.87%**
Portfolio turnover rate 12.18% 4.47% 6.52%
<TABLE>
<CAPTION>
PENNSYLVANIA FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.39 $10.44 $10.16 $10.56 $10.55 $ 9.84 $ 9.49 $ 9.65 $ 9.52 $ 9.49
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .58 .60 .62 .62 .63 .64 .64 .65 .66 .69
Net realized and unrealized gains (losses) .32 (.04) .29 (.41) .01 .70 .38 (.09) .19 .06
------------------------------------------------------------------------------------------
Total from investment operations .90 .56 .91 .21 .64 1.34 1.02 .56 .85 .75
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.58) (.61) (.63) (.61) (.63) (.63) (.67) (.72) (.72) (.72)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains (.14) - - - - - - - - -
------------------------------------------------------------------------------------------
Total distributions (.73) (.61) (.63) (.61) (.63) (.63) (.67) (.72) (.72) (.72)
------------------------------------------------------------------------------------------
Net asset value, end of year $10.56 $10.39 $10.44 $10.16 $10.56 $10.55 $ 9.84 $ 9.49 $ 9.65 $ 9.52
------------------------------------------------------------------------------------------
Total return* 8.90% 5.53% 9.15% 2.22% 5.99% 13.84% 10.99% 5.76% 8.86% 7.97%
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of year (in 000's) $713,141 $658,339 $639,847 $587,366 $615,546 $505,845 $391,301 $305,592 $180,720$73,851
Ratios to average net assets:
Expenses .65% .64% .64% .63% .56% .58% .59% .62% .73% .59%
Expenses excluding waiver
and payments by affiliate .65% .64% .64% .63% .56% .58% .59% .62% .73% .75%
Net investment income 5.49% 5.84% 5.96% 6.15% 5.90% 6.34% 6.71% 6.82% 6.66% 6.97%
Portfolio turnover rate 12.74 22.24% 9.71% 12.91% 4.73% 5.87% 4.44% 5.23% 6.31% 1.56%
</TABLE>
PENNSYLVANIA FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.43 $10.47 $10.17
-------------------------
Income from investment operations:
Net investment income .52 .55 .47
Net realized and unrealized gains (losses) .33 (.05) .30
----------------------
Total from investment operations .85 .50 .77
----------------------
Less distributions from:
Net investment income (.53) (.54) (.47)
Net realized gains (.14) - -
--------------------
Total distributions (.67) (.54) (.47)
------------------------
Net asset value, end of year $10.61 $10.43 $10.47
=========================
Total return* 8.35% 4.98% 7.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $25,899 $11,935 $3,110
Ratios to average net assets:
Expenses 1.21% 1.21% 1.22%**
Net investment income 4.89% 5.22% 5.36%**
Portfolio turnover rate 12.74% 22.24% 9.71%
<TABLE>
<CAPTION>
PUERTO RICO FUND - CLASS I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED FEB. 28 1998 1997 19961 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a shares outstanding throughout the year)
Net asset value, beginning of year $11.51 $11.59 $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54 $10.57
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .62 .65 .66 .67 .68 .70 .69 .76 .71 .70
Net realized and unrealized gains (losses) .36 .02 .30 (.50) .03 .67 .30 .04 .24 .04
------------------------------------------------------------------------------------------
Total from investment operations .98 .67 .96 .17 .71 1.37 .99 .80 .95 .74
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ` (.62) (.65)+ (.67)++ (.69) (.69) (.68) (.71) (.72) (.73) (.77)
Net realized gains (.01) (.10) (.01) - - - - - - -
------------------------------------------------------------------------------------------
Total distributions (.63) (.75) (.68) (.69) (.69) (.68) (.71) (.72) (.73) (.77)
------------------------------------------------------------------------------------------
Net asset value, end of year $11.86 $11.51 $11.59 $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54
==========================================================================================
Total return* 8.78% 6.03% 8.68% 1.60% 5.95% 12.48% 9.31% 7.45% 8.91% 7.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $210,325 $192,525 $190,577 $176,888 $175,036 $144,806 $112,714 $91,601 $82,819 $80,431
Ratios to average net assets:
Expenses .75% .73% .74% .73% .66% .69% .70% .70% .70% .72%
Net investment income 5.35% 5.62% 5.71% 5.95% 5.77% 6.18% 6.45% 7.08% 6.65% 6.76%
Portfolio turnover rate 7.94% 21.09% 27.99% 18.30% 5.10% 10.37% 15.01% 6.09% 14.12% 50.57%
</TABLE>
PUERTO RICO FUND - CLASS II
YEAR ENDED FEB. 28 1998 1997 19961
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.53 $11.62 $11.32
--------------------------
Income from investment operations:
Net investment income .56 .58 .50
Net realized and unrealized gains .34 .02 .30
--------------------------
Total from investment operations .90 .60 .80
--------------------------
Less distributions from:
Net investment income (.55) (.59) (.49)
Net realized gains (.01) (.10) (.01)
--------------------------
Total distributions (.56) (.69) (.50)
--------------------------
Net asset value, end of year $11.87 $11.53 $11.62
==========================
Total return* 8.07% 5.33% 7.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $3,615 $1,679 $533
Ratios to average net assets:
Expenses 1.31% 1.30% 1.32%**
Net investment income 4.78% 5.04% 5.16%**
Portfolio turnover rate 7.94% 21.09% 27.99%
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized except where indicated. Prior to May 1,
1994, dividends from net investment income were reinvested at the Offering
Price.
**Annualized.
1 For the period May 1, 1995 (effective date) to February 29, 1996.
2 For the period October 3, 1988 (effective date) to February 28, 1989.
3 For the period July 1, 1996 (effective date) to February 28, 1997.
4 For the period April 23, 1988 (effective date) to February 28, 1989.
5 For the period September 21, 1992 (effective date) to February 28, 1993.
+ Includes distributions in excess of net investment income in the amount of
$.006.
++ Includes distributions in excess of net investment income in the amount of
$.001.
+++ Includes distributions in excess of net investment income in the amount of
$.008.
++++ Includes distributions in excess of net investment income in the amount
of $.003.
HOW DO THE FUNDS INVEST THEIR ASSETS?
A QUICK LOOK AT THE FUNDS
FRANKLIN FEDERAL
INTERMEDIATE-TERM FRANKLIN HIGH YIELD FRANKLIN PUERTO STATE SPECIFIC
TAX-FREE TAX-FREE RICO TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUNDS
GOAL: High current GOAL: High current GOAL: High current GOAL: High
income free from yield free from income free from current tax-free
federal income federal income federal income income for
taxes. taxes. taxes and from the residents of the
personal income fund's state.
taxes of a
majority of
states.
STRATEGY: Invests STRATEGY: Invests STRATEGY: Invests STRATEGY: Invest
in investment in municipal in investment in investment
grade municipal securities rated in grade municipal grade municipal
securities whose any rating category securities whose securities whose
interest is free and whose interest interest is free interest is free
from federal is free from from federal from federal and
income taxes and federal income income taxes and state personal
maintains a taxes. The fund from the personal income taxes, if
dollar-weighted tries to invest in income taxes of a any, for
average portfolio lower-rated majority of residents of the
maturity of three securities to the states. fund's state.
to 10 years. extent their yields
justify their risk,
in the Manager's
opinion.
WHAT IS THE MANAGER'S APPROACH?
The Manager tries to select securities that it believes will provide the best
balance between risk and return within each fund's range of allowable
investments. The Manager considers a number of factors including general
market and economic conditions, and the credit quality of the issuer when
selecting securities for each fund.
To provide tax-free income to shareholders, the Manager typically uses a buy
and hold strategy. This means it holds securities in a fund's portfolio for
income purposes, rather than trading securities for capital gains. The
Manager may sell a security at any time, however, when the Manager believes
doing so could help the fund meet its goals.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses.
Each fund's focus on income does not mean it invests only in the
highest-yielding securities available, or that it can avoid losses of
principal.
WHO MAY WANT TO INVEST?
The funds may be appropriate for investors in higher tax brackets who seek
high current income that is free from federal and, for the state and Puerto
Rico funds, state personal income taxes. If you are a resident of Puerto
Rico, you should consult with your tax advisor before investing in any of the
funds.
Each fund's level of risk and potential reward depends on the quality and
maturity of its investments. Each fund, except the High Yield Fund, invests
only in investment grade municipal securities. With its broader range of
investments, the High Yield Fund has the potential for higher yields, but
also carries a higher degree of risk. Please consider your investment goals
and tolerance for price fluctuations and risk when making your investment
decision.
The value of each fund's investments and the income they generate will vary
from day to day, and generally reflect interest rates, market conditions, and
other federal and state political and economic news. When you sell your
shares, they may be worth more or less than what you paid for them.
THE FUNDS IN MORE DETAIL
WHAT ARE THE FUNDS' GOALS?
The investment goal of the FEDERAL INTERMEDIATE FUND is to provide investors
with as high a level of income exempt from federal income taxes, including
the individual alternative minimum tax, as is consistent with prudent
investing, while seeking preservation of shareholders' capital.
The investment goal of the HIGH YIELD FUND is to provide investors with a
high current yield exempt from federal income taxes. As a secondary goal, the
High Yield Fund seeks capital appreciation to the extent possible and
consistent with its principal investment goal.
The investment goal of the PUERTO RICO FUND is to provide investors with as
high a level of income exempt from federal income taxes as is consistent with
prudent investing while seeking preservation of shareholders' capital. The
Puerto Rico Fund also seeks to provide a maximum level of income that is free
from the personal income taxes of a majority of states, although this policy
is not a fundamental investment goal of the fund.
The investment goal of EACH STATE FUND 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 fund's state as is consistent
with prudent investing, while seeking preservation of shareholders' capital.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
Municipal securities help the funds meet their investment goals because they
generally pay interest free from federal income tax. Municipal securities
issued by a fund's state or that state's counties, municipalities,
authorities, agencies, or other subdivisions also generally pay interest free
from state personal income taxes, if any, for residents of the fund's state.
Municipal securities issued by U.S. territories such as Guam, Puerto Rico, or
the Mariana Islands also generally pay interest free from state personal
income taxes in a majority of states.
Each fund normally invests:
o at least 80% of its assets in securities that pay interest free from
federal income taxes, including the federal alternative minimum tax (this
policy is fundamental). Each fund applies this test to its net assets,
except for the Federal Intermediate Fund, which applies the test to its
total assets;
o at least 80% of its net assets in securities that pay interest free from
the personal income taxes, if any, of its state, although each fund tries
to invest all of its assets in these securities (this policy is also
fundamental and applies only to the state funds); and
o at least 65% of its total assets in municipal securities of its state or
territory (this policy applies only to the state and Puerto Rico funds).
The High Yield 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.
While each fund tries to invest 100% of its assets in municipal securities
whose interest is free from federal and, for the state and Puerto Rico funds,
state personal income taxes, it is possible, although not anticipated, that a
fund may have up to 20% of its assets in securities that pay taxable
interest. If you are subject to the federal alternative minimum tax, please
keep in mind that each fund may also have a portion of its assets in
municipal securities that pay interest subject to the federal alternative
minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities
based on their opinion of the issuer's credit quality. Most rating agencies
use a descending alphabet scale to rate long-term securities, and a
descending numerical scale to rate short-term securities. For example, Fitch
and S&P use AAA, AA, A and BBB for their top four long-term ratings, while
Moody's uses Aaa, Aa, A and Baa. Securities rated in the highest rating
category are "top rated." Securities in the top four ratings are "investment
grade," although securities in the fourth highest rating may have some
speculative features. These ratings are described in more detail in the
Appendix to this prospectus and in the SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
o Each fund, except the High Yield Fund, only buys investment grade
securities or unrated securities that the Manager believes are comparable.
o The High Yield Fund invests at least 65% of its assets in high yield
securities. The fund may invest in securities rated in any rating
category, although the fund currently invests primarily in securities
rated BBB/Baa or below or in unrated securities that the Manager believes
are comparable. The fund may invest in defaulted securities if the Manager
believes the issuer may resume making interest payments or other favorable
developments seem likely in the near future. The fund, however, does not
currently intend to invest more than 10% of its assets in defaulted
securities.
o While the fund tries to invest in lower-rated securities, the Manager may
consider existing market conditions, the availability of lower-rated
securities, and whether the difference in yields between higher- and
lower-rated securities justifies the higher risk of lower-rated securities
when selecting securities for the fund's portfolio.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from less than one year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields.
o The Federal Intermediate Fund may buy securities with any maturity but
must maintain a dollar-weighted average portfolio maturity of three to 10
years.
o The High Yield, Puerto Rico and state funds have no restrictions on the
maturity of the securities they may buy or on their average portfolio
maturity. Since securities with longer maturities may provide higher
yields, the High Yield Fund generally invests in longer-term securities.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either
at specific intervals or whenever a benchmark rate changes. While this
feature helps to protect against a decline in the security's market price, it
also lowers a fund's income when interest rates fall. Of course, a fund's
income from its variable rate investments may also increase if interest rates
rise.
o Each fund, except the High Yield Fund, may invest in investment grade
variable and floating rate securities.
o The High Yield Fund may invest in variable and floating rate securities
in any rating category.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body
must set aside the money to make the lease payments each year. If the money
is not set aside, the issuer or the lessee can end the lease without penalty.
If the lease is cancelled, investors who own the municipal lease obligations
may not be paid.
o Each fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the Manager believes unusual or adverse economic,
market or other conditions exist, it may invest a fund's portfolio in a
temporary defensive manner. Under these circumstances, each fund may invest
all of its assets in securities that pay taxable interest, including (i) high
quality commercial paper; (ii) securities issued by or guaranteed by the full
faith and credit of the U.S. government; or (iii) for the state and Puerto
Rico funds, municipal securities issued by a state, territory or local
government other than the fund's state or territory.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price
of the security may fluctuate during the time before payment and delivery,
the fund assumes the risk that the value of the security at delivery may be
more or less than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in any one state or type
of project to help spread and reduce the risks of investment. Non-diversified
funds may invest a greater portion of their assets in the securities of one
issuer than diversified funds. Economic, business, political or other changes
can affect all securities of a similar type. A non-diversified fund may be
more sensitive to these changes.
o The Connecticut, Federal Intermediate and Michigan funds are
non-diversified funds, although they intend to meet certain
diversification requirements for tax purposes. The other funds are all
diversified. Each fund may invest more than 25% of its assets in municipal
securities that finance similar types of projects, such as hospitals,
housing, industrial development, transportation or pollution control.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about each fund's investment policies,
including those described above, please see "How Do the Funds Invest Their
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, a fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
Like all investments, an investment in a fund involves risks. The risks of
each fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in any one of the state
or Puerto Rico funds may involve more risk than an investment in a fund that
does not focus on securities of a single state or territory. Because each
fund holds many securities, it is likely to be less risky than any one, or
few, directly held municipal investments.
GENERAL RISK. There is no assurance that a fund will meet its investment
goal. A fund's share price, and the value of your investment, may change.
Generally, when the value of a fund's investments go down, so does the fund's
share price. Similarly, when the value of a fund's investments go up, so does
the fund's share price. Since the value of a fund's shares can go up or down,
it is possible to lose money by investing in a fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices
fall. The opposite is also true: municipal security prices go up when
interest rates fall. To explain why this is so, assume you hold a municipal
security offering a 5% yield. A year later, interest rates are on the rise
and comparable securities are offered with a 6% yield. With higher-yielding
securities available, you would have trouble selling your 5% security for the
price you paid - causing you to lower your asking price. On the other hand,
if interest rates were falling and 4% municipal securities were being
offered, you would be able to sell your 5% security for more than you paid.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. Changes in the credit quality of the credit provider could
affect the value of the security and the fund's share price.
Securities rated below investment grade, sometimes called "municipal junk
bonds," generally have more credit risk than higher-rated securities. The
risk of default or price changes due to changes in the issuer's credit
quality is greater. Issuers of lower-rated securities are typically in weaker
financial health than issuers of higher-rated securities, and their ability
to make interest payments or repay principal is less certain. These issuers
are also more likely to encounter financial difficulties and to be materially
affected by these difficulties when they do encounter them. The market price
of lower-rated securities may fluctuate more than higher-rated securities and
may decline significantly in periods of general or regional economic
difficulty. Lower-rated securities may also be less liquid than higher-rated
securities.
None of the funds, except the High Yield Fund, invests in securities rated
below investment grade. The High Yield Fund, however, may invest up to 100%
of its assets in these securities. The following table provides a summary of
the credit quality of the High Yield Fund's portfolio. These figures are
dollar-weighted averages of month-end assets during the fiscal year ended
February 28, 1998.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
- ---------- --------------------
AAA 25.0%1
AA 3.7%
A 4.5%
BBB 31.0%2
BB 21.2%3
B 5.8%4
CCC 0.9%
Not Rated 7.9%5
1 6.8% are unrated and have been included in the AAA rating category.
2 8.7% are unrated and have been included in the BBB rating category.
3 14.5% are unrated and have been included in the BB rating category.
4 1.2% are unrated and have been included in the B rating category.
5 This figure includes securities that have not been rated by S&P, but that
have been rated by another rating agency.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, a fund may have to replace it with a
lower-yielding security.
STATE RISKS. Since each state fund invests heavily in municipal securities of
its state, events in that state are likely to affect the fund's investments
and its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to municipal issuers.
A negative change in any one of these or other areas could affect the ability
of a state's municipal issuers to meet their obligations. It is important to
remember that economic, budget and other conditions within a state are
unpredictable and can change at any time.
To the extent the Federal Intermediate, High Yield or Puerto Rico funds are
invested in a state, events in that state may affect their investments in
that state and their performance.
For more specific information on the economy and financial strength of the
funds' various states, please see "What Are the Risks of Investing in the
Funds?" in the SAI.
U.S. TERRITORIES RISKS. Each fund may invest a portion of its assets in
municipal securities issued by U.S. territories such as Guam, Puerto Rico or
the Mariana Islands. As with state municipal securities, events in any of
these territories where a fund invests may affect the fund's investments and
its performance.
The Puerto Rico Fund invests heavily in Puerto Rico municipal securities.
Events in Puerto Rico, including the types of events discussed under "State
Risks" above, are likely to affect the fund's investments and its
performance.
For more information on U.S. territories and their economy, please see "What
Are the Risks of Investing in the Funds?" in the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
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 fund, except
the Connecticut Fund. Investment Advisory is the investment manager of the
Connecticut Fund.
The Manager manages each fund's assets and makes its investment decisions.
The 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
Manager and its affiliates manage over $232 billion in assets, including $48
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 funds' Code of
Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers and Portfolio Manager of Investment Advisory
Mr. Kenny has been an analyst or portfolio manager for the Arizona, Colorado,
Connecticut, Federal intermediate, Indiana, Michigan, New Jersey and Oregon
funds since inception and the High Yield, Pennsylvania and Puerto Rico funds
since 1987. 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 securities
industry-related committees and associations.
John B. Pinkham
President of Investment Advisory
Mr. Pinkham has been an analyst or portfolio manager for the Connecticut Fund
since inception. Mr. Pinkham holds 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 several
securities industry-related committees and associations.
John Pomeroy
Portfolio Manager of Investment Advisory
Mr. Pomeroy has been an analyst or portfolio manager for the Connecticut Fund
since 1989. Mr. Pomeroy 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 an analyst or portfolio manager for the Indiana, New
Jersey, and Pennsylvania funds since their inception. 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.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been an analyst or portfolio manager for the Arizona,
Colorado, Federal intermediate, Michigan, New Jersey and Oregon funds since
inception and the High Yield, Pennsylvania and Puerto Rico funds since 1987.
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.
John Wiley
Portfolio Manager of Advisers
Mr. Wiley has been an analyst or portfolio manager for the Indiana and Oregon
funds since 1991. Mr. Wiley 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.
Carrie Higgins
Portfolio Manager of Advisers
Ms. Higgins has been an analyst or portfolio manager for the Arizona Fund
since 1992 and for the Michigan Fund since inception. Ms. Higgins holds a
Bachelor of Science degree in Economics from the University of California at
Davis. She joined the Franklin Templeton Group in 1990. She is a member of
several securities industry-related committees and associations.
Mark Orsi
Portfolio Manager of Advisers
Mr. Orsi has been an analyst or portfolio manager for the Colorado Fund since
1991 and for the Federal Intermediate Fund since inception. Mr. Orsi holds a
Bachelor of Science degree in Finance from Santa Clara University. He joined
the Franklin Templeton Group in 1990. He is a member of several securities
industry-related committees and associations.
Ben Barber
Portfolio Manager of Advisers
Mr. Barber has been an analyst or portfolio manager for the High Yield Fund
since 1993. He has a Bachelor of Arts Degree in International Relations and
Political Science from the University of California at Santa Barbara. Mr.
Barber joined the Franklin Templeton Group in 1991. He is a member of
several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1998, management
fees paid to the Manager and total operating expenses, as a percentage of
average monthly net assets, were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
Arizona Fund 0.48% 0.63% 1.19%
Colorado Fund 0.55% 0.71% 1.27%
Connecticut Fund 0.57% 0.73% 1.29%
Federal Intermediate Fund 0.54%* 0.75%* -
High Yield Fund 0.46% 0.61% 1.18%
Indiana Fund 0.63% 0.82% -
Michigan Fund 0.00%* 0.25%* -
New Jersey Fund 0.49% 0.66% 1.22%
Oregon Fund 0.51% 0.67% 1.22%
Pennsylvania Fund 0.49% 0.65% 1.21%
Puerto Rico Fund 0.56% 0.75% 1.31%
*Management fees, before any advance waiver, totaled 0.61% for the Federal
Intermediate Fund and 0.65% for the Michigan Fund. Total operating expenses
were 0.82% for the Federal Intermediate Fund and 1.01% for the Michigan Fund.
Under an agreement by Advisers to waive or limit its fees, the Federal
Intermediate and Michigan 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. The Manager tries to obtain the best execution on all
transactions. If the 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
Do the Funds Buy Securities for Their Portfolios?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the Manager, FT Services
provides certain administrative services and facilities for each fund.
During the fiscal year ended February 28, 1998, administration fees paid to
FT Services, as a percentage of average daily net assets, were as follows:
ADMINISTRATION
FEES
Arizona Fund 0.13%
Colorado Fund 0.15%
Connecticut Fund 0.15%
Federal Intermediate Fund 0.15%
High Yield Fund 0.08%
Indiana Fund 0.15%
Michigan Fund 0.15%
New Jersey Fund 0.14%
Oregon Fund 0.14%
Pennsylvania Fund 0.14%
Puerto Rico Fund 0.15%
These fees are paid by the Manager. They are not a separate expense of the
funds. Please see "Investment Management and Other Services" in the SAI for
more information.
THE RULE 12B-1 PLANS
Each fund and class 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. 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 their Class I
plans 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, Securities Dealers may not be eligible to receive the
Rule 12b-1 fees associated with the purchase.
Under the Class II plans, a 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, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
A 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 plans. 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
Funds' Underwriter" in the SAI.
HOW DO THE FUNDS MEASURE PERFORMANCE?
From time to time, the funds advertise their performance. Commonly used
measures of performance include total return, current yield and current
distribution rate. Each fund 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 fund will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how each fund calculates its performance figures,
please see "How Do the Funds Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
- --------------------------------------------------------------------------------
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). This new law makes sweeping changes to the Code.
Because many of these changes are complex, they are discussed in the SAI.
- --------------------------------------------------------------------------------
Taxation of the Funds' Invest- How Do the Funds Earn Income and Gains?
ments. Each fund invests your Each fund earns interest and other
money in the municipal and other income (the fund's "income") on its
securities described in the investments. When a fund sells a
section "How Do the Funds Invest security for a price that is higher
Their Assets?" Special tax rules than it paid, it has a gain. When a
may apply when determining the fund sells a security for a price
income and gains that each fund that is lower than it paid, it has a
earns on its investments. These loss. If a fund has held the
rules may, in turn, affect the security for more than one year, the
amount of distributions that a gain or loss will be a long-term
fund pays to you. These special capital gain or loss. If a fund has
tax rules are discussed in the held the security for one year or
SAI. less, the gain or loss will be a
short-term capital gain or loss. A
Taxation of the Funds. As a fund's gains and losses are netted
regulated investment company, each together, and, if the fund has a net
fund generally pays no federal gain (the fund's "gains"), that gain
income tax on the income and gains will generally be distributed to you.
that it distributes to you.
TAXATION OF SHAREHOLDERS
Distributions. Distributions made WHAT IS A DISTRIBUTION?
to you from interest income on As a shareholder, you will receive
municipal securities will be your share of a fund's income and
exempt from the regular federal gains on its investments. A fund's
income tax. Distributions made to interest income on municipal
you from other income on temporary securities is paid to you as exempt-
investments, short-term capital interest dividends. A fund's ordinary
gains, or ordinary income from the income and short term capital gains
sale of market discount bonds will are paid to you as ordinary
be taxable to you as ordinary dividends. A fund's long-term
dividends, whether you receive capital gains are paid to you as
them in cash or in additional capital gain distributions. If a
shares. Distributions made to you fund pays you an amount in excess of
from interest on certain private its income and gains, this excess
activity bonds, while still exempt will generally be treated as a non-
from the regular federal income taxable distribution. These amounts,
tax, are a preference item when taken together, are what we call a
determining your alternative fund's distributions to you.
minimum tax. The fund will send
you a statement in January of the
current year that reflects the
amount of exempt-interest
dividends, ordinary dividends,
capital gain distributions,
interest income that is a tax
preference item under the
alternative minimum tax and non-
taxable distributions you received
from the fund in the prior year.
This statement will include
distributions declared in December
and paid to you in January of the
current year, but which are
taxable as if paid on December 31
of the prior year. The IRS
requires you to report these
amounts on your income tax return
for the prior year. A fund's
statement for the prior year will
tell you how much of your capital
gain distribution represents 28%
rate gain. The remainder of the
capital gain distribution
represents 20% rate gain.
- --------------------------------------------------------------------------------
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the funds'
distributions will qualify for the corporate dividends-received deduction.
Redemptions and Exchanges. If you WHAT IS A REDEMPTION?
redeem your shares or if you A redemption is a sale by you to the
exchange your shares in the funds fund of some or all of your shares in
for shares in another Franklin the fund. The price per share you
Templeton Fund, you will generally receive when you redeem fund shares
have a gain or loss that the IRS may be more or less than the price at
requires you to report on your which you purchased those shares. An
income tax return. If you exchange of shares in the fund for
exchange fund shares held for 90 shares of another Franklin Templeton
days or less and pay no sales Fund is treated as a redemption of
charge, or a reduced sales charge, fund shares and then a purchase of
for the new shares, all or a shares of the other fund. When you
portion of the sales charge you redeem or exchange your shares, you
paid on the purchase of the shares will generally have a gain or loss,
you exchanged is not included in depending upon whether the amount you
their cost for purposes of receive for your shares is more or
computing gain or loss on the less than your cost or other basis in
exchange. If you hold your shares the shares. Please call Fund
for six months or less, any loss Information for a free shareholder
you have will be disallowed to the Tax Information Handbook if you need
extent of any exempt-interest more information on calculating the
dividends paid on your shares. gain or loss on the redemption or
Any such loss not disallowed will exchange of your shares.
be treated as a long-term capital
loss to the extent of any long-
term capital gain distributions
paid on your shares. All or a
portion of any loss on the
redemption or exchange of your
shares will be disallowed by the
IRS if you buy other shares in the
fund within 30 days before or
after your redemption or exchange.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the funds, and gains arising from redemptions or exchanges of
your fund shares, will generally be subject to state and local income tax.
Distributions paid from the interest earned on municipal securities of a
state, or its political subdivisions, will generally be exempt from that
state's personal income taxes. Dividends paid from interest earned on
qualifying U.S. territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands and Guam) will also be exempt from that
state's personal income taxes. A state does not, however, grant tax-free
treatment to interest on investments in municipal securities of other states.
Corporate taxpayers subject to a state's corporate income or franchise tax may
be subject to special rules. The holding of fund shares may also be subject
to state and local intangibles taxes. Each fund in which you are a
shareholder will provide you with information at the end of each calendar year
on the amounts of such dividends that may qualify for exemption from reporting
on your individual income tax returns. You may wish to contact your tax
advisor to determine the state and local tax consequences of your investment
in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS. Exempt-interest dividends
paid to you, although exempt from the regular federal income tax, are
includible in the tax base for determining the taxable portion of your social
security or railroad retirement benefits. The IRS requires you to disclose
these exempt-interest dividends on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
exempt-interest dividends, capital gain distributions and gains arising from
redemptions or exchanges of your fund shares. Fund shares held by the estate
of a non-U.S. investor may be subject to U.S. estate tax. You may wish to
contact your tax advisor to determine the U.S. and non-U.S. tax consequences
of your investment in a fund.
BACKUP WITHHOLDING. When you open What Is a Backup Withholding?
an account, IRS regulations Backup withholding occurs when a fund
require that you provide your is required to withhold and pay over
taxpayer identification number to the IRS 31% of your distributions
("TIN"), certify that it is and redemption proceeds. You can
correct, and certify that you are avoid backup withholding by providing
not subject to backup withholding the fund with your TIN, and by
under IRS rules. If you fail to completing the tax certifications on
provide a correct TIN or the your shareholder application that you
proper tax certifications, the IRS were asked to sign when you opened
requires the fund to withhold 31% your account. However, if the IRS
of all the distributions instructs the fund to begin backup
(including ordinary dividends and withholding, it is required to do so
capital gain distributions), and even if you provided the fund with
redemption proceeds paid to you. your TIN and these tax
The fund is also required to begin certifications, and backup
backup withholding on your account withholding will remain in place
if the IRS instructs the fund to until the fund is instructed by the
do so. The fund reserves the IRS that it is no longer required.
right not to open your account,
or, alternatively, to redeem your
shares at the current Net Asset
Value, less any taxes withheld, if
you fail to provide a correct TIN,
fail to provide the proper tax
certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" AND "APPENDICES - STATE TAX
TREATMENT" IN THE SAI. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED
IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST
BY CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The funds are series of the Franklin Tax-Free Trust (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 Federal Intermediate, Indiana, and
Michigan funds, each fund offers 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 and Franklin Puerto Rico Tax-Free Income Fund - Class II. All
shares outstanding before the offering of Class II shares, and all shares of
the Federal Intermediate, Indiana and Michigan 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 April 2, 1998, Resources owned of record and beneficially more than 25%
of the outstanding shares of the Michigan Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUNDS DO NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open your account: $100*
o To add to your account: $25*
*We reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with
your check made payable to the fund.
For additional investments:
Send a check made payable to the fund.
Please include your account number on
the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that
number is busy, call 1-650/312-2000
collect, to receive a wire control number
and wire instructions. You need a new wire
control number every time you wire money
into your account. If you do not have a
currently effective wire control number, we
will return the money to the bank, and we
will not credit the purchase to your
account.
2. For an initial investment you must also
return your signed shareholder application
to the fund.
IMPORTANT DEADLINES: If we receive your
call before 1:00 p.m. Pacific time and the
bank receives the wired funds and reports
the receipt of wired funds to the fund by
3:00 p.m. Pacific time, we will credit the
purchase to your account that day. If we
receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we
will credit the purchase to your account
the following business day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
o Higher front-end sales o Lower front-end sales
charges than Class II charges than Class I
shares. There are shares
several ways to reduce
these charges, as
described below. There
is no front-end sales
charge for purchases of
$1 million or more.*
o Contingent Deferred o Contingent Deferred
Sales Charge on Sales Charge on
purchases of $1 million purchases sold within
or more sold within one 18 months
year
o Lower annual expenses o Higher annual expenses
than Class II shares than Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
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 TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I (ALL FUNDS EXCEPT
FEDERAL INTERMEDIATE)
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.15% 2.20% 2.00%
$1,000,000
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
FEDERAL INTERMEDIATE FUND
Under $100,000 2.25% 2.30% 2.00%
$100,000 but less than 1.75% 1.78% 1.50%
$250,000
$250,000 but less than 1.25% 1.26% 1.00%
$500,000
$500,000 but less than 1.00% 1.01% 0.85%
$1,000,000
$1,000,000 or more* None None None
*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 "Choosing a Share Class."
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. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the SAME CLASS
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the SAME CLASS of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their
investment accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. 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 goal
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 signed written instructions
3. Include any outstanding share
certificates for the shares you want to
exchange
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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, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge 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.
If you exchange your Class II shares for shares of Money Fund II, however,
the time your shares are held in that fund will count towards the completion
of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"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 funds do 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 funds, such as "Advisor Class" or "Class Z" shares. Because
the funds do not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of a 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 a 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 signed written instructions. 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 funds are not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 until your check or draft has cleared, which may take
seven business days or more. 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. A Contingent Deferred
Sales Charge will not apply, however, to Class I purchases over $250 million
in the High Yield Fund. 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 Account fees
o Redemptions by a 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 FUNDS?
Each 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.
The funds declare dividends from their net investment income daily and pay
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 each class.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR SHARES.
If you buy shares shortly before a fund deducts a capital gain distribution
from its Net Asset Value, please keep in mind that you will receive a portion
of the price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from a 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 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.
5. 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."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
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
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
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.
HOW AND WHEN SHARES ARE PRICED
The funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price 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. Each
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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.
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.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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.
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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 told us that you do not want telephone privileges to apply to
your account.
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 a fund.
Under the plan, you can have money transferred automatically from your
checking account to a 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 a 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 a 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. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
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 by
mail or by phone 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 a 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
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
- -----------------------------------------------
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 funds 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 funds' financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds 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 funds 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 funds, 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 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 Federal Intermediate, 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 Federal Intermediate, 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. The holding period for Class I begins on the
first day of the month in which you buy shares. Regardless of when during the
month you buy Class I shares, they will age one month on the last day of that
month and each following month. The holding period for Class II begins on the
day you buy your shares. For example, if you buy Class II shares on the 18th
of the month, they will age one month on the 18th day of the next 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the
Connecticut Fund's investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGER - Franklin Advisers, Inc or Franklin Investment Advisory Services,
Inc., as applicable
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 for each fund
except the Federal Intermediate Fund. The maximum front-end sales charge for
the Federal Intermediate Fund 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.
APPENDIX
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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" 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.
FRANKLIN TAX-FREE TRUST
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
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?........................
What Are the Risks of Investing in the Funds?................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Do the Funds Buy
Securities for Their Portfolios?............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Funds' Underwriter.......................................
How Do the Funds Measure Performance?........................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendices...................................................
Description of Ratings......................................
State Tax Treatment.........................................
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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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The funds are series of the Franklin Tax-Free Trust (the "Trust"), an
open-end management investment company. The Prospectus, dated July 1, 1998,
which we may amend from time to time, contains the basic information you
should know before investing in the funds. For a free copy, call 1-800/DIAL
BEN.
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
EACH 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 DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. Each state
fund also tries to provide a maximum level of income that is exempt from
personal income taxes, if any, for resident shareholders of the fund's state.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
The following gives more detailed information about each fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUNDS BUY
Each fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
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-free under
the laws of that state, in order for any portion of the fund's distributions
to be free from the state's personal income taxes. If a fund's state requires
this, the fund will try to invest its assets as required so that its
distributions will be free from personal income taxes for resident
shareholder's of the fund's state.
Below is a description of various types of municipal and other securities
that each fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which each fund
may also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
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 are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
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.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, 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. For example, 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. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest 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.
VARIABLE OR FLOATING RATE SECURITIES. Each fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. Each fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews a
fund's municipal lease obligations 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 obligations and the
extent to which they are rated or, if unrated, comply with existing criteria
and procedures followed to ensure that they are comparable in quality to the
ratings required for the fund to invest, including an assessment of the
likelihood of the lease being canceled, taking into account how essential the
leased property is and the term of the lease compared to the useful life of
the leased property; (b) the size of the municipal securities market, both in
general and with respect to municipal lease obligations; and (c) the extent
to which the type of municipal lease obligations 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.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, each fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest. Keeping in mind
that each fund can invest in municipal lease obligations without percentage
limits, the funds' holdings in municipal lease obligations were:
AS OF FEBRUARY 28, 1998
(AS A PERCENTAGE OF NET ASSETS)
Arizona Fund 9.62%
Florida Fund 6.20%
Insured Fund 5.76%
Massachusetts Fund 4.75%
Michigan Fund 2.61%
Minnesota Fund 2.10%
Ohio Fund 2.80%
CALLABLE BONDS. Each fund may invest in callable bonds, which allow the
issuer to repay some or all of the bonds ahead of schedule. If a bond is
called, the fund will receive the principal amount, the accrued interest, and
a small additional payment as a call premium. Advisers may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. If the fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the fund also may not be
able to recover the full amount it paid for the bond. One way for a fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
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 a fund's callable bonds
may impact 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
from calls of callable bonds. In light of each fund's pricing policies and
certain amortization procedures required by the IRS, the funds do not expect
to suffer any material adverse impact related to the value at which they have
carried the bonds in connection with calls of bonds purchased at a premium.
As with any investment strategy, however, there is no guarantee that a call
may not have a more substantial impact than anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. Each 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
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. 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 receive 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.
An investment in zero-coupon and delayed interest securities may cause a fund
to recognize income and make distributions to shareholders before it receives
any cash payments on its investment. To generate cash to satisfy distribution
requirements, a fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as
the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. Each 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 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 is a promissory note issued by a corporation to finance its
short-term credit needs.
MORE INFORMATION ABOUT SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by a fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When a 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 funds believe that their Net
Asset Value or income will not be negatively affected by their purchase of
municipal securities on a when-issued basis. The funds will not engage in
when-issued transactions for investment leverage purposes.
Although a fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When a
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. If assets
of a fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
ILLIQUID INVESTMENTS. Each fund may invest up to 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.
DIVERSIFICATION. All of the funds, except the Arizona and Florida funds, are
diversified funds. The Arizona and Florida funds are non-diversified. 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 are not generally considered an obligation of the original municipality
when determining diversification.
Each fund, including the Arizona and Florida funds, intends to meet certain
diversification requirements for tax purposes. These requirements are
discussed under "Additional Information on Distributions and Taxes."
Each fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for each fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
INSURANCE. Each fund invests primarily in insured municipal securities. Each
insured municipal security in a fund's portfolio is covered by either a "New
Issue Insurance Policy," a "Portfolio Insurance Policy" or a "Secondary
Insurance Policy." Normally, the underlying rating of an insured security is
one of the top three ratings of Fitch, Moody's or S&P. An insurer may insure
municipal securities that are rated below the top three ratings or that are
unrated if the securities otherwise meet the insurer's quality standards.
A fund will only enter into a contract to buy an insured municipal security
if either permanent insurance or an irrevocable commitment to insure the
municipal security by a qualified municipal bond insurer is in place. 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 a fund's shares, or (iii) a fund's dividend
distributions.
NEW ISSUE INSURANCE POLICY. An issuer may obtain a New Issue Insurance
Policy, also called a "Primary Insurance Policy," when securities are issued.
The issuer pays all premiums on the policy in advance. The policy continues
in effect as long as the securities are outstanding and the insurer remains
in business, and may not otherwise be canceled. Since the policy remains in
effect as long as the securities are outstanding, the insurance is likely to
increase the credit rating of the security, as well as its purchase price and
resale value.
PORTFOLIO INSURANCE POLICY. Each fund may obtain a Portfolio Insurance
Policy, which is effective only as long as the fund holds the securities
described in the policy and the insurer is in business and meeting its
obligations. If the fund sells a security or the principal amount of the
security is paid before maturity, the policy terminates as to that security
and will continue to cover only those securities the fund still holds. 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 for that security.
Because coverage under a Portfolio Insurance Policy ends when the fund sells
a security, the insurance does not affect the resale value of the security.
Therefore, the fund may hold any security insured under a Portfolio Insurance
Policy that is in default or in significant risk of default. Advisers will
consider the value of the insurance for the principal and interest payments,
the market value of the 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. 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.
The insurer may not change premium rates for securities covered by a
Portfolio Insurance Policy, 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, each 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, the coverage and obligation
of the fund to pay monthly premiums for the security under the Portfolio
Insurance Policy ends. The insurer may not change the price of the Secondary
Insurance Policy, 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. A defaulted security covered by a Secondary
Insurance Policy would be valued at its market value.
One of the reasons a 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 may otherwise be without the
insurance. The triple A or equivalent rating is not automatic, however, and
must specifically be requested from Fitch, Moody's or S&P for each security.
A fund is likely to buy a Secondary Insurance Policy if, in Advisers'
opinion, 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.
Each 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 investment goals.
QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any
one of several qualified municipal bond insurers, which allows Advisers to
diversify among credit enhancements. Each 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
Fitch, Moody's or S&P.
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 guarantees 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 funds nor Advisers makes any
representations as to the ability of any insurance company to meet its
obligation to a fund if called upon to do so.
Currently, to the best of our knowledge, there are no securities in the
funds' portfolios on which an insurer is paying the principal or interest
otherwise payable by the issuer of the bond.
GENERAL. 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.
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.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
The following gives more information about the risks of investing in the
funds. Please read this information together with the section "What Are the
Risks of Investing in the Funds?" in the Prospectus.
STATE RISKS. Since each state fund mainly invests in the municipal securities
of its state, its performance is closely tied to the ability of issuers of
municipal securities in its state to continue to make principal and interest
payments on their securities. The issuers' ability to do this is in turn
dependent on economic, political and other conditions within the state. Below
is a discussion of certain conditions that may affect municipal issuers in
the funds' various states. It is not a complete analysis of every material
fact that may affect the ability of issuers of municipal securities to meet
their debt obligations or the economic or political conditions within any
state. The information below is based on the most recent data available to
the funds from Fitch, Moody's and S&P, three historically reliable sources,
but the funds have not independently verified it.
The ability of issuers of municipal securities to continue to make principal
and interest payments is dependent in large part on their ability to raise
revenues, primarily through taxes, and to control spending. Many factors can
affect a state's revenues including the rate of population growth,
unemployment rates, personal income growth, federal aid, and the ability to
attract and keep successful businesses. A number of factors can also affect a
state's spending including current debt levels, and the existence of
accumulated budget deficits. The following provides some information on these
and other factors.
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
strong, the rate of growth has slowed since 1996 as a result of California's
economic recovery and thus less migration from that state. Employment growth
has also been strong, at 5.6% in 1996. Driven recently by gains in the
high-tech manufacturing sector, employment growth is expected to remain solid
over the near-term. Unemployment was 4.7% in May 1997, slightly less than the
national average.
Arizona's economy has continued its shift away from agriculture and mining
and towards manufacturing and services. The move away from farming, which
generally consumes about 80% of the water used in the state, may increase the
water available for municipal uses. As of July 1997, manufacturing accounted
for approximately 9.3% of the state's total employment, trade 23%, services
30%, government 13%, construction 6% and finance, insurance and real estate
8%.
Under its constitution, Arizona is not allowed to issue general obligation
debt. Thus, gross state debt levels have remained moderate. The state has
historically relied on lease obligations, revenue bonds, and pay-as-you-go
financing for its capital needs. A significant portion of the state's debt
has been supported by motor fuel taxes and highway user fees.
Recently, Arizona's strong economic growth has enabled the state to replenish
its general fund, while at the same time cutting taxes. At the end of fiscal
1996, the general fund had a balance of 12.6% of expenditures, up from 6.9%
at the end of fiscal 1995. Due to higher-than-anticipated income tax
receipts, the state expects the general fund balance will remain strong
through fiscal 1998. In addition, the state's budget stabilization fund held
$252 million as of July 1997, which may help provide protection in an
economic downturn.
Despite periods of financial stress during the 1980s and early 1990s, the
state's financial outlook is generally considered stable.
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. Florida's population growth has placed increased
demands on government services and the state's infrastructure, but so far the
state has been able to meet these challenges.
Florida's economy has continued to diversify, moving from a relatively narrow
base of agriculture and seasonal tourism towards a service and trade economy.
Job growth has been steady, with an unemployment rate of 4.6% in April 1997,
below the national rate of 4.8%. The state's job growth has been dependent on
growth in the services, construction and trade sectors, with the state's
business services sector accounting for approximately 30% of new non-farm
employment since 1991. Much of this growth has come from growth in the
personnel services sector, however, which typically represents low paying
jobs. The state's tourism industry, which has supported the state's other
employment sectors, has been somewhat erratic since the recession in the
early 1990s. A tourism increase of 3.1% is expected, however, through fiscal
1998.
Due in large part to the state's healthy economy, Florida's population has
also continued to grow. It was recently 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.
Florida's tax base has been relatively narrow, with 70% of its revenues
derived from the state's 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. It should be noted, however, that this amendment exempts revenues
pledged to bonds, so existing and new debt issues should be unaffected.
Although Florida's debt levels have been steadily rising, in recent years the
state has generated operating surpluses, while maintaining tax levels and
providing funds for the state's growth in government services. Overall, the
state's financial outlook is considered stable.
MASSACHUSETTS. Massachusetts' economy has continued to recover from the
national and regional recessions of the early 1990s. While manufacturing has
declined, the state's services sector has grown and recently accounted for
35% of the state's employment. Overall, the state's economic growth has been
driven by growth in its high-tech industries, financial services, education
and health care. In fact, high-tech industries recently accounted for 9.2% of
total employment, the highest concentration of any state. The state's
unemployment rate has steadily declined from 4.3% in 1996 to 3.3% in October
1997, below the national average, and has begun to cause concerns about a
tight labor market.
Although the state's economy has improved, its debt levels have remained
among the highest in the nation. Spending disciplines imposed during the
state's severe financial difficulties in the early 1990s have helped and have
resulted in seven consecutive years of balanced financial operations. At the
same time, the state has greatly reduced its reliance on temporary borrowing.
While the state has regained some control over its budget, continuing
expenditure pressures may present fiscal challenges. After a period of
restrained debt issuance, pressure to increase borrowing has been building.
Funding for routine infrastructure needs and a costly tunnel project have
been the focus of this pressure. Spending for education is also expected to
increase, and the state still has a relatively high unfunded pension
liability. With the rate of economic growth expected to slow down in coming
years, Massachusetts' biggest challenge is likely to be the long term
management of its capital and debt plans.
MICHIGAN. Michigan's economy has continued to rely on national economic
trends, especially the demand for durable goods. Its economic base has been
dependent on its manufacturing sector, which recently accounted for 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. In recent years, however, the state has
made some improvements in the diversity of its economy.
Michigan's finances have also improved since the early 1990s when the state's
financial position was weakened by the national recession and imbalances in
the budget. Tighter budget controls and the positive effect on revenues of
the state's relatively strong economy have allowed the state to replenish
reserves, which had been severely depleted during the early 1990s. The
state's budget stabilization fund was estimated at more than $1.2 billion at
September 30, 1997. Michigan may need the increased stability these reserve
levels provide to offset higher school funding requirements, which were
estimated at $8.6 billion in fiscal 1997 and represented the largest expense
item for the state.
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. In the coming years, key spending
areas for the state are expected to include corrections, human services,
education and facilities for general government.
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, 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. Nonetheless, the state's reliance on manufacturing creates
vulnerability to recession and potential financial volatility. The state's
sizable financial reserves, however, may lend some stability and help protect
the state against future spending pressures and economic cycles.
In recent years, Ohio's employment growth has slowed to below the national
average. For the year ended August 1997, non-farm job growth was 0.8%,
compared to 2% for the nation. Much of this growth has been concentrated in
the services and trade sectors. Unemployment was 4.2% in October 1997, below
the national rate.
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. The state enjoyed large operating surpluses in fiscal years 1995
and 1996, and a somewhat smaller surplus in fiscal 1997.
U.S. TERRITORIES RISKS. Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, the ability of U.S.
territory issuers to continue to make principal and interest payments may
also affect a fund's performance. As with state municipal issuers, the
ability to make these payments is dependent on economic, political and other
conditions. Below is a discussion of certain conditions within some of the
territories where the fund's may be invested. It is not a complete analysis
of every material fact that may affect the ability of issuers of U.S.
territory municipal securities to meet their debt obligations or the economic
or political conditions within the territories. It is based on the most
recent data available to the funds from Fitch, Moody's and S&P, and other
historically reliable sources, but it has not been independently verified by
the funds.
GUAM. Guam's economy has been heavily dependent on its tourism industry,
which accounted for almost 40% of total employment in 1997. It has been
especially dependent on Japanese tourism, which has made Guam vulnerable to
fluctuations in the relationship between the U.S. dollar and the Japanese yen.
In the early to mid 1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a
comprehensive financial plan in June 1995 to help balance the budget and
reduce the general fund deficit by fiscal 1999. As of fiscal 1997, the
deficit has improved and the budget was balanced. It is not yet known,
however, whether the goals of the financial plan will be met.
While Guam's debt burden has been manageable, Guam's ability to maintain
current debt levels may be challenged in the near future. U.S. military
downsizing has reduced the federal presence on the island and may also reduce
federal support for infrastructure projects. At the same time, Guam has faced
increasing pressure to improve its infrastructure to help generate economic
development.
Overall, as of October 1997, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and the need for continued political
support towards the goals of the financial plan.
MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum
wage and immigration laws in an effort to help stimulate industry and the
economy. The islands' minimum wage has been more than $2 per hour below the
U.S. level and tens of thousands of workers have immigrated from various
Asian countries to provide cheap labor for the islands' industries. Recently,
the islands' tourism and apparel industries combined to help increase gross
business receipts from $224 million in 1985 to $2 billion in 1996. Currently,
however, Congress is considering a bill to raise wages and curtail
immigration to the Mariana Islands. If it passes, it could have an adverse
affect on the islands' economy.
PUERTO RICO. Overall, both Moody's and S&P consider Puerto Rico's outlook
stable. The economy has continued to grow and diversify. Much of this growth
has come from the construction, trade and service sectors, which have
accounted for more than 50% of the employment base. Manufacturing has
contributed 41% of the island's gross domestic product and has accounted for
16% of employment. Despite an increasingly skilled workforce, unemployment
has remained high at 12-13%.
Over the past three years, Puerto Rico's financial performance has improved.
Strong revenue growth and more aggressive tax collection procedures have
helped. Fiscal 1997 appeared to be on target, and expectations are that the
fiscal 1998 budget will also be balanced.
Puerto Rico's debt levels have been high but manageable at $2,600 per capita
or 12% of expenditures. Going forward, these levels may increase as Puerto
Rico attempts to finance significant capital and infrastructure improvements.
Puerto Rico will also need to address its large unfunded pension liability of
more than $5 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Code. This Code section has given certain U.S. corporations operating in
Puerto Rico significant tax advantages. These incentives have helped
considerably with Puerto Rico's economic growth, especially with the
development of its manufacturing sector. U.S. firms that have benefited from
these incentives have provided a significant portion of Puerto Rico's
revenues, employment and deposits in local financial institutions. The
section 936 incentives will be phased out over a 10-year period ending in
2006. It is hoped that this long phase-out period will give Puerto Rico
sufficient time to lessen the potentially negative effects of section 936's
elimination.
INVESTMENT RESTRICTIONS
Each fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of a fund or (ii)
67% or more of the shares of a fund present at a shareholder meeting if more
than 50% of the outstanding shares of a fund are represented at the meeting
in person or by proxy, whichever is less. Each 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 bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
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 each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each 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 each 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 (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds; and formerly, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 50 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (65)
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 or trustee,
as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); director or trustee of 25 of the investment
companies in the Franklin Templeton Group of Funds; formerly, chairman
(1995-1997) and trustee (1993-1997) of National Child Research Center,
assistant to the President of the United States and Secretary of the Cabinet
(1990-1993), general counsel to the United States Treasury Department
(1989-1990) and counselor to the Secretary and Assistant Secretary for Public
Affairs and Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (65)
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. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (57)
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 of the other subsidiaries of Franklin Resources, Inc. and of
54 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
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 28 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (70)
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), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, Hambrecht and
Quist Group, Director, H & Q Healthcare Investors and Lockhead Martin
Corporation and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President 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
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, 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 54 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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 54 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (35)
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 (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 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, 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 BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM TEMPLETON OF FUNDS ON WHICH
NAME THE TRUST*** GROUP OF FUNDS****EACH SERVES*****
Frank H. Abbott, III.......... $31,200 $165,937 28
Harris J. Ashton.............. 29,900 344,642 50
S. Joseph Fortunato........... 29,900 361,562 52
David W. Garbellano*.......... 14,300 91,317 N/A
Frank W.T. LaHaye............. 29,900 141,433 28
Gordon S. Macklin............. 29,900 337,292 50
Edith E. Holiday**............ 2,600 72,875 25
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended February 28, 1998.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with
approximately 170 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
funds 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 April 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the funds: approximately
22,985 shares of the Michigan Fund - Class I and 617 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. Each fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for each fund to buy, hold or
sell and the selection of brokers through whom each 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 each fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of each 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 each fund.
Similarly, with respect to each 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 funds 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 funds'
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, each 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 each fund for the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996.
MANAGEMENT FEES PAID
1998 1997 1996
- -----------------------------------------------------------------------------
Arizona Fund ......................... $53,600* $ 9,209* $ 0*
Florida Fund ............................... 164,237* 126,611* 92,697*
Insured Fund ............................... 7,894,099 7,848,890 7,882,310
Massachusetts Fund ......................... 1,792,766 1,649,833 1,580,640
Michigan Fund .............................. 5,414,427 5,284,581 5,130,941
Minnesota Fund ............................. 2,465,946 2,439,817 2,430,182
Ohio Fund .................................. 3,586,169 3,391,314 3,268,575
*For the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, management fees, before any advance waiver, totaled $300,020,
$238,269 and $190,058, respectively, for the Arizona Fund, and $559,377,
$447,534 and $362,566, 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,
1999. 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 on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the fund, 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 each 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 table below shows the administration fees paid to FT Services for the
fiscal years ended February 28, 1998 and 1997. These fees are paid by
Advisers. They are not a separate expense of the funds.
ADMINISTRATION FEES PAID
1998 1997*
- --------------------------------------------------------------------
Arizona Fund ......................... $70,517 $23,726
Florida Fund ............................... 132,554 46,588
Insured Fund ............................... 1,847,411 767,504
Massachusetts Fund ......................... 492,589 190,575
Michigan Fund .............................. 1,420,284 584,545
Minnesota Fund ............................. 693,528 286,923
Ohio Fund .................................. 1,013,556 410,345
*For the period October 1, 1996 through February 28, 1997.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
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
each 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 funds' independent auditors. During the fiscal year
ended February 28, 1998, 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, 1998.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the funds are principal transactions at net prices,
the funds incur little or no brokerage costs. The funds deal directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on their 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 funds do not buy bonds in underwritings where they are given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The funds seek 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 funds' 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 funds' portfolio transactions.
If purchases or sales of securities of the funds 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996, the funds paid no brokerage commissions.
As of February 28, 1998, the funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their 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 funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of the funds
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 a 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 funds'
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 funds 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:
SIZE OF PURCHASE - U.S. DOLLARS SALES 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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
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 the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds 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
amount of your total purchases, less redemptions, is 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 each 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
goals 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. 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. Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the 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 funds do 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 funds 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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are not responsible for tracking down uncashed
checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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 a 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 funds on behalf of numerous
beneficial owners for recordkeeping operations performed with respect to such
owners. For each beneficial owner in the omnibus account, a 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 close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the funds are informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. 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 each 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 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 close of the NYSE that will not be reflected in the
computation of the 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 funds may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of
the Code, each fund has qualified and continues to qualify to pay
"exempt-interest dividends" to shareholders. These dividends are derived from
interest income exempt from regular federal income tax, and are not subject
to regular federal income tax when they are distributed. In addition, to the
extent that exempt-interest dividends are derived from interest on
obligations of a state or its political subdivisions, or from interest on
qualifying U.S. territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands or Guam), they will also be exempt from
that state's personal income taxes. A state generally does not grant tax-free
treatment to interest on state and municipal securities of other states.
At the end of each calendar year, each fund in which you are a shareholder
will provide you with the percentage of any dividends paid that may qualify
for tax-free treatment on your personal income tax return. You should consult
with your personal tax advisor to determine the application of your state and
local laws to these distributions. Corporate shareholders should consult with
their corporate tax advisors about whether any of their distributions may be
exempt from corporate income or franchise taxes. For more information, please
see "Appendices - State Tax Treatment."
A fund may earn taxable income on any temporary investments, on the discount
from stripped obligations or their coupons, on income from securities loans
or other taxable transactions, on the excess of short-term capital gains over
long-term capital losses earned by the fund ("net short-term capital gain"),
or on ordinary income derived from the sale of market discount bonds. Any
distributions by a fund from such income will be taxable to you as ordinary
income, whether you take them in cash or additional shares.
From time to time, a fund may buy a tax-exempt bond in the secondary market
for a price that is less than the principal amount of the bond. This discount
is called market discount if it exceeds a de minimis amount of discount under
the Code. For market discount bonds purchased after April 30, 1993, a portion
of the gain on sale or disposition (not to exceed the accrued portion of
market discount at the time of the sale) is treated as ordinary income rather
than capital gain. Any distribution by a fund of market discount income will
be taxable as ordinary income to you. A fund may elect in any fiscal year not
to distribute to you its taxable ordinary income and to pay a federal income
or excise tax on this income at the fund level. In any case, the amount of
market discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions 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 gains realized by a fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by a fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a fund after July
28, 1997 that were held for more than one year but not more than 18 months,
and securities sold by a fund before May 7, 1997 that were held for more than
one year. These gains will be taxable to individual investors at a maximum
rate of 28%.
"20% RATE GAINS": gains resulting from securities sold by a fund after July
28, 1997 that were held for more than 18 months, and under a transitional
rule, securities sold by a fund between May 7 and July 28, 1997 (inclusive)
that were held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than five years that are sold after
December 31, 2000. For individuals who are subject to tax at higher rates,
qualified 5-year gains are net gains on securities that are purchased after
December 31, 2000 and are held for more than five years. Taxpayers subject to
tax at the higher rates may also make an election for shares held on January
1, 2001 to recognize gain on their shares in order to qualify such shares as
qualified 5-year property.
Each fund in which you are a shareholder will advise you at the end of each
calendar year of the amount of its capital gain distributions paid during the
calendar year that qualify for these maximum federal tax rates. Additional
information on reporting these distributions on your personal income tax
returns is available in Franklin Templeton's Tax Information Handbook. This
handbook has been revised to include 1997 Act tax law changes. Please call
Fund Information to request a copy. Questions about your personal tax
reporting should be addressed to your personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if
any, which are declared in October, November or December to shareholders of
record in such month, and paid to you in January of the following year, will
be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. A fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared. You will receive a Form 1099-DIV only for calendar years in which a
fund has made a distribution to you of taxable ordinary income or capital
gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you are
a shareholder will inform you of the amount and character of your
distributions at the time they are paid, and will shortly after the close of
each calendar year advise you of the tax status for federal income tax
purposes of such distributions, including the portion of the distributions
that on average comprise taxable income or interest income that is a tax
preference item under the alternative minimum tax. If you have not held fund
shares for a full year, you may have designated as taxable, tax-exempt or as
a tax preference a percentage of income that is not equal to the actual
amount of such income earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of a fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, each
fund must meet certain specific requirements, including:
The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of a fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets;
The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
The fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year
and 98% of its capital gain net income earned during the twelve month period
ending October 31 (in addition to undistributed amounts from the prior year)
to you by December 31 of each year in order to avoid federal excise taxes.
Each fund intends to declare and pay sufficient dividends in December (or in
January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your shares in a fund and any remaining
loss will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by a fund on those shares. The
holding periods and categories of capital gain that apply under the 1997 Act
are described above in the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your
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 your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in a fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because each fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the funds for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans)
issued after August 7, 1986, while still exempt from regular federal income
tax, is a preference item for taxpayers in determining their alternative
minimum tax under the Code and under the income tax provisions of several
states. Private activity bond interest could subject you to or increase your
liability under federal and state alternative minimum taxes, depending on
your individual or corporate tax position.
Consistent with each fund's investment goals, each fund may acquire such
private activity bonds if, in Advisers' opinion, such bonds represent the
most attractive investment opportunity then available to the fund. Persons
who are defined in the Code as "substantial users" (or persons related to
such users) of facilities financed by private activity bonds should consult
with their tax advisors before buying shares in the fund.
The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as
on activities financed by certain industrial development or private activity
bonds. Some of these bonds, including bonds for sports arenas, parking
facilities, and pollution control facilities, are generally not tax-exempt
because they generally do not pay tax-exempt interest.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To
the extent a fund invests in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by a fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, a fund may elect to accrue market discount
on a current basis, in which case the fund will be required to distribute any
such accrued discount. If a fund does not elect to accrue market discount
into income currently, gain recognized on sale will be recharacterized as
ordinary income instead of capital gain to the extent of any accumulated
market discount on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, a fund may
be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each 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 each 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, 1998, February 28, 1997 and
February 29, 1996.
AMOUNT RECEIVED
TOTAL AMOUNT IN CONNECTION
COMMISSIONS RETAINED BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
1998
Arizona Fund.................. $444,372 $30,899 $ 0
Florida Fund.................. 643,277 42,185 0
Insured Fund.................. 3,458,998 223,393 9,982
Massachusetts Fund............ 971,661 60,293 4,495
Michigan Fund................. 2,762,586 167,731 18,468
Minnesota Fund................ 1,114,812 67,354 1,216
Ohio Fund..................... 2,325,085 145,477 6,228
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
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 funds for acting as underwriter.
THE RULE 12B-1 PLANS
Each fund and class 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 PLANS. Under the Class I plan of each fund, except the Arizona
and Florida funds, 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 plans, the Board has determined that the annual
fees payable under each 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 plans, each 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 plans.
The Class I plans do not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, each 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 plans, each 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, 1998, 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:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID
EXPENSES BY FUND
Arizona Fund $ 77,997 $45,494
Florida Fund 123,638 86,539
Insured Fund - Class I 1,397,555 1,356,340
Insured Fund - Class II 310,486 184,564
Massachusetts Fund - Class I 339,617 271,872
Massachusetts Fund - Class II 109,453 59,910
Michigan Fund - Class I 1,011,866 947,333
Michigan Fund - Class II 245,508 160,660
Minnesota Fund - Class I 439,436 402,795
Minnesota Fund - Class II 77,003 44,063
Ohio Fund - Class I 664,537 610,310
Ohio Fund - Class II 212,863 128,927
HOW DO THE FUNDS 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 a 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 funds
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 funds 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 the periods indicated below,
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 period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for each class for the indicated periods
ended February 28, 1998, was as follows:
AVERAGE ANNUAL TOTAL RETURN
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
Arizona Fund ................ 04/30/93 4.78% -% -% 5.92%
Florida Fund ................ 04/30/93 5.30 - - 5.22
Insured Fund - Class I ...... 04/03/85 3.49 5.02 7.30 8.14
Insured Fund - Class II...... 05/01/95 5.49 - - 6.38
Massachusetts Fund - Class I 04/03/85 3.91 5.15 7.02 7.44
Massachusetts Fund - Class II 05/01/95 5.76 - - 6.46
Michigan Fund - Class I ..... 04/03/85 3.79 5.13 7.19 7.79
Michigan Fund - Class II .... 05/01/95 5.65 - - 6.55
Minnesota Fund - Class I .... 04/03/85 3.05 4.65 6.80 7.73
Minnesota Fund - Class II ... 05/01/95 4.99 - - 5.83
Ohio Fund - Class I ......... 04/03/85 3.63 5.10 7.24 7.82
Ohio Fund - Class II ........ 05/01/95 5.63 - - 6.61
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 each period at the end
of each period
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, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for each class
for the indicated periods ended February 28, 1998, was as follows:
CUMULATIVE TOTAL RETURN
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
Arizona Fund ................. 04/30/93 4.78% -% -% 32.02%
Florida Fund ................. 04/30/93 5.30 - - 27.87
Insured Fund - Class I ....... 04/03/85 3.49 27.74 102.31 174.48
Insured Fund - Class II....... 05/01/95 5.49 - - 19.15
Massachusetts Fund - Class I . 04/03/85 3.91 28.52 97.17 152.36
Massachusetts Fund - Class II. 05/01/95 5.76 - - 19.40
Michigan Fund - Class I ...... 04/03/85 3.79 28.43 100.25 163.19
Michigan Fund - Class II ..... 05/01/95 5.65 - - 19.66
Minnesota Fund - Class I ..... 04/03/85 3.05 25.51 93.00 161.55
Minnesota Fund - Class II .... 05/01/95 4.99 - - 17.39
Ohio Fund - Class I .......... 04/03/85 3.63 28.25 101.11 164.30
Ohio Fund - Class II ......... 05/01/95 5.63 - - 19.86
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by a 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, 1998, was as follows:
YIELD
CLASS I CLASS II
Arizona Fund ........... 4.34% -%
Florida Fund ........... 4.30 -
Insured Fund ........... 4.06 3.63
Massachusetts Fund...... 4.04 3.63
Michigan Fund .......... 4.04 3.61
Minnesota Fund ......... 4.04 3.61
Ohio Fund ............. 4.06 3.63
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 funds 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, 1998, was as follows:
TAXABLE-
EQUIVALENT YIELD
CLASS I CLASS II
Arizona Fund 7.58% -%
Florida Fund 7.12 -
Insured Fund 6.73 6.01
Massachusetts Fund 7.60 6.83
Michigan Fund 7.00 6.25
Minnesota Fund 7.31 6.53
Ohio Fund 7.24 6.48
As of February 28, 1998, 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 ...................... 42.7%
Florida ...................... 39.6
Insured ...................... 39.6
Massachusetts ................ 46.8
Michigan ..................... 42.3
Minnesota .................... 44.7
Ohio ......................... 43.9
*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 funds will be updated
to reflect these changes. The funds expect updates may be necessary as tax
rates are changed by federal and state governments. The advantage of tax-free
investments, like the funds, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales
material for the funds.
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. 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, 1998, was as follows:
CURRENT
DISTRIBUTION RATE
CLASS I CLASS II
Arizona Fund ........... 4.69% -%
Florida Fund ........... 4.74 -
Insured Fund ........... 5.13 4.71
Massachusetts Fund ..... 4.79 4.37
Michigan Fund .......... 4.80 4.35
Minnesota Fund ........ 4.91 4.49
Ohio Fund .............. 4.89 4.46
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,
1998, was as follows:
TAXABLE-
EQUIVALENT
DISTRIBUTION RATE
CLASS I CLASS II
Arizona Fund ........... 8.19% -%
Florida Fund ........... 7.85 -
Insured Fund ........... 8.49 7.80
Massachusetts Fund ..... 9.01 8.22
Michigan Fund .......... 8.31 7.53
Minnesota Fund ......... 8.88 8.12
Ohio Fund .............. 8.72 7.96
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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 funds may include in their advertising or sales material information
relating to investment goals 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 funds may satisfy your
investment goal, advertisements and other materials about the funds 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 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer 40 Index - an index composed of the yield to maturity of
40 bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that
meet certain requirements and deleting an equivalent number according to
their secondary market trading activity. As a result, the average par
call date, average maturity date, and average coupon rate can and have
changed over time. The average maturity generally has been about 29-30
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 CS 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. 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 funds 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 fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of a fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the funds' portfolios, 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund cannot guarantee that these goals will be met.
Each 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 50 years
and now services more than 3 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, a pioneer in
international investing. The Mutual Series team, 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 $232 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
120 U.S. based open-end investment companies to the public. Each 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 $48 billion in municipal bond assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
March 31, 1997.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1998, taxes could
cost almost $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 1998). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of such securities, however, may fluctuate.
This fluctuation will have a direct impact on the Net Asset Value of an
investment in a fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the funds 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.
As of April 2, 1998, the principal shareholders of the funds, beneficial or
of record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
ARIZONA FUND -
CLASS I
Dean Witter FBO 289,925.143 5.3%
Megan W. Delaney
PO Box 909
P.O. Box 250 Church Street Station
New York, NY 10008-0250
MASSACHUSETTS FUND - CLASS II
Maurice Samuel Vaughn TRST 92,182.920 7.3%
Maurice Samuel Vaughn LIV TR
UA DTD 04/01/97
7971 Park Dr.
Fair Oaks, CA 95628
MINNESOTA FUND - CLASS II
Industricorp & Co. Inc. 57,925.950 6.5%
A/C 19 2996 00
312 Central Ave. NE
Minneapolis, MN 55414
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 funds' Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of a fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of a fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that a 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 a 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 a 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, each 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 and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) 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, 1998,
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 funds' 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, offer
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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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 funds dated July 1, 1998, 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 that 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
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. 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. These 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 and 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" 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 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 each 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 TAX TREATMENT
The following information on the state income tax treatment of dividends from
the funds is based upon correspondence and sources believed to be reliable.
Except where otherwise noted, the information pertains to individual state
income taxation only. You may be subject to local taxes on dividends or the
value of your shares. Corporations, trusts, estates and other entities may be
subject to other taxes and should consult with their tax advisors or their
state department of revenue. For some investors, a portion of the dividend
income may be subject to the federal and/or state alternative minimum tax.
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 or 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
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
Franklin Virginia Tax-Free Income Fund
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?
What Are the Risks of Investing in the Funds?
Investment Restrictions
Officers and Trustees
Investment Management
and Other Services
How Do the Funds Buy
Securities for Their Portfolios?
How Do I Buy, Sell and
Exchange Shares?
How Are Fund Shares Valued?
Additional Information on
Distributions and Taxes
The Funds' Underwriter
How Do the Funds
Measure Performance?
Miscellaneous Information
Financial Statements
Useful Terms and Definitions
Appendices
Description of Ratings
State Tax Treatment
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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 funds are diversified series of the Franklin Tax-Free Trust (the "Trust"),
an open-end management investment company. The Prospectus, dated July 1, 1998,
which we may amend from time to time, contains the basic information you should
know before investing in the funds. For a free copy, call 1-800/DIAL BEN.
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 EACH
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 DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. Each fund also
tries to provide a maximum level of income that is exempt from personal income
taxes, if any, for resident shareholders of the fund's state. These goals are
fundamental, which means that they may not be changed without shareholder
approval.
The following gives more detailed information about each fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUNDS BUY
Each fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
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-free under
the laws of that state, in order for any portion of the fund's distributions to
be free from the state's personal income taxes. If a fund's state requires
this, the fund will try to invest its assets as required so that its
distributions will be free from personal income taxes for resident
shareholder's of the fund's state.
Below is a description of various types of municipal and other securities that
each fund may buy. Other types of municipal securities may become available
that are similar to those described below and in which each fund may also
invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which will
be used to pay the notes. They are usually general obligations of the issuer,
secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
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 are normally issued to provide interim financing until
long-term financing can be arranged. Proceeds from long-term bond issues then
provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
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.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, 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. For example,
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. Some authorities have further
security in the form of state assurances (although without obligation) to make
up deficiencies in the debt service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest 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.
VARIABLE OR FLOATING RATE SECURITIES. Each fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate). The
interest rate adjustments are designed to help stabilize the security's price.
Variable or floating rate securities may include a demand feature, which may be
unconditional. The demand feature allows the holder to demand prepayment of the
principal amount before maturity, generally on no more than 30 days' notice.
The holder receives the principal amount plus any accrued interest either from
the issuer or by drawing on a bank letter of credit, a guarantee or insurance
issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. Each fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews a
fund's municipal lease obligations 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 obligations and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are comparable in quality to the
ratings required for the fund to invest, including an assessment of the
likelihood of the lease being canceled, taking into account how essential the
leased property is and the term of the lease compared to the useful life of the
leased property; (b) the size of the municipal securities market, both in
general and with respect to municipal lease obligations; and (c) the extent to
which the type of municipal lease obligations 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.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government liabilities
beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a
municipal lease obligation than they do to curtail payments on other municipal
securities. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligations. If this happens, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligations or that the payments will continue
to be tax-free.
While cancellation risk is inherent to municipal lease obligations, each fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest. Keeping in mind
that each fund can invest in municipal lease obligations without percentage
limits, the funds' holdings in municipal lease obligations were:
AS OF FEBRUARY 28, 1998
(AS A PERCENTAGE OF NET ASSETS)
Alabama Fund 1.47%
Florida Fund 11.10%
Georgia Fund 4.30%
Kentucky Fund 17.32%
Louisiana Fund 5.25%
Maryland Fund 10.66%
Missouri Fund 17.04%
North Carolina Fund 11.33%
Texas Fund 0%
Virginia Fund 2.42%
CALLABLE BONDS. Each fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. Advisers may sell a callable bond before
its call date, if it believes the bond is at its maximum premium potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a bond
is called, the fund may have to replace it with a lower-yielding security. If
the fund originally paid a premium for the bond because it had appreciated in
value from its original issue price, the fund also may not be able to recover
the full amount it paid for the bond. One way for a fund to protect itself from
call risk is to buy bonds with call protection. Call protection is an assurance
that the bond will not be called for a specific time period, typically five to
10 years from when the bond is issued.
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 a fund's callable bonds may
impact 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 from calls of
callable bonds. In light of each fund's pricing policies and certain
amortization procedures required by the IRS, the funds do not expect to suffer
any material adverse impact related to the value at which they have carried the
bonds in connection with calls of bonds purchased at a premium. As with any
investment strategy, however, there is no guarantee that a call may not have a
more substantial impact than anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a triple
A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. Each 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 market interest
rates, liquidity of the security, and the issuer's perceived credit quality.
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 receive 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.
An investment in zero-coupon and delayed interest securities may cause a fund
to recognize income and make distributions to shareholders before it receives
any cash payments on its investment. To generate cash to satisfy distribution
requirements, a fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as
the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. Each 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 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 is a promissory note issued by a corporation to finance its
short-term credit needs.
MORE INFORMATION ABOUT SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by a fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or yield
opportunity, or could experience a loss.
When a 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 funds believe that their Net Asset
Value or income will not be negatively affected by their purchase of municipal
securities on a when-issued basis. The funds will not engage in when-issued
transactions for investment leverage purposes.
Although a fund will generally buy municipal securities on a when-issued basis
with the intention of acquiring the securities, it may sell the securities
before the settlement date if it is considered advisable. When a 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. If assets of a fund are held in cash
pending the settlement of a purchase of securities, the fund will not earn
income on those assets.
ILLIQUID INVESTMENTS. Each fund may invest up to 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.
DIVERSIFICATION. All of the funds, except the Maryland Fund, are diversified
funds. The Maryland Fund is non-diversified. 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 are not generally considered an obligation of
the original municipality when determining diversification.
Each fund, including the Maryland Fund, intends to meet certain diversification
requirements for tax purposes. These requirements are discussed under
"Additional Information on Distributions and Taxes."
Each fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for each fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
The following gives more information about the risks of investing in the funds.
Please read this information together with the section "What Are the Risks of
Investing in the Funds?" in the Prospectus.
STATE RISKS. Since each fund mainly invests in the municipal securities of its
state, its performance is closely tied to the ability of issuers of municipal
securities in its state to continue to make principal and interest payments on
their securities. The issuers' ability to do this is in turn dependent on
economic, political and other conditions within the state. Below is a
discussion of certain conditions that may affect municipal issuers in the
funds' various states. It is not a complete analysis of every material fact
that may affect the ability of issuers of municipal securities to meet their
debt obligations or the economic or political conditions within any state. The
information below is based on the most recent data available to the funds from
Fitch, Moody's and S&P, three historically reliable sources, but the funds have
not independently verified it.
The ability of issuers of municipal securities to continue to make principal
and interest payments is dependent in large part on their ability to raise
revenues, primarily through taxes, and to control spending. Many factors can
affect a state's revenues including the rate of population growth, unemployment
rates, personal income growth, federal aid, and the ability to attract and keep
successful businesses. A number of factors can also affect a state's spending
including current debt levels, and the existence of accumulated budget
deficits. The following provides some information on these and other factors.
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 centered around the
state's major metropolitan areas. Aggressive economic development and business
recruitment policies have helped to increase growth throughout the state. In
recent years, these policies have brought in significant capital investments,
which may help Alabama offset 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. Under the state's
constitution, expenditure reductions are required to prevent deficit spending
should the state experience revenue shortfalls. Since fiscal 1993, across the
board cuts have not been needed due mainly to Alabama's recent economic growth
and strict cost containment measures.
Alabama has been 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 recommended that all new revenue growth in the
educational trust go to K-12 schools and the state issued revenue bonds
totaling $215 million for capital improvements to its schools. Alabama's state
legislature also adopted a plan to remedy these violations and deficiencies,
although as of May 1997 the court had not accepted the plan.
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. Florida's population growth has placed increased demands on
government services and the state's infrastructure, but so far the state has
been able to meet these challenges.
Florida's economy has continued to diversify, moving from a relatively narrow
base of agriculture and seasonal tourism towards a service and trade economy.
Job growth has been steady, with an unemployment rate of 4.6% in April 1997,
below the national rate of 4.8%. The state's job growth has been dependent on
growth in the services, construction and trade sectors, with the state's
business services sector accounting for approximately 30% of new non-farm
employment since 1991. Much of this growth has come from growth in the
personnel services sector, however, which typically represents low paying jobs.
The state's tourism industry, which has supported the state's other employment
sectors, has been somewhat erratic since the recession in the early 1990s. A
tourism increase of 3.1% is expected, however, through fiscal 1998.
Due in large part to the state's healthy economy, Florida's population has also
continued to grow. It was recently 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.
Florida's tax base has been relatively narrow, with 70% of its revenues derived
from the state's 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. It should be
noted, however, that this amendment exempts revenues pledged to bonds, so
existing and new debt issues should be unaffected.
Although Florida's debt levels have been steadily rising, in recent years the
state has generated operating surpluses, while maintaining tax levels and
providing funds for the state's growth in government services. Overall, the
state's financial outlook is considered stable.
GEORGIA. Georgia has been among the fastest growing states in the U.S. in
population. Its diversified economy has also performed well in recent years,
with growth in the services sector driving the state's overall employment
growth. Other factors that have contributed to Georgia's recent economic growth
have been the state's low cost of living, extensive transportation
infrastructure, low unemployment rates, and strong activity in the construction
sector. Atlanta, which has been at the heart of the state's economic growth,
has also been a trade, service and transportation center for much of the
southeast region.
Financially, the state's strong economic and revenue growth have so far allowed
the state to meet the needs of its growing population, while maintaining a
sound financial position. The state has generated operating surpluses in each
of the last three fiscal years from 1995 to 1997, and has also fully funded its
reserves. While revenues have grown at a rate of more than 9% since 1991, the
state has kept growth in general fund expenditures below 9%. In addition,
recent investments in financial information and reporting technology should
help improve the state's financial reporting and accuracy. In the near term,
key expenses for the state may be in the areas of education, health and
welfare.
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 several 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.
Since fiscal 1993, Kentucky's financial management has steadily improved. In
1995, the state funded a $100 million budgetary reserve fund, which by the end
of fiscal 1996 had grown to $200 million. Despite a recent court ruling that
will require the state to refund an estimated $240 million to taxpayers, as of
July 1997, the state was expected to maintain its reserve fund at its 1996
level through fiscal 1998 and to maintain its balanced budget.
LOUISIANA. Louisiana's economy has been historically cyclical due to its
reliance on oil and gas production and petro-chemical products. During the
energy sector decline of the 1980s, however, the state made some improvements
towards a more diversified economy. During that time, the leading source of
jobs was the service sector, which in 1997 accounted for 26% of employment.
Nonetheless, much of the state's recent economic growth has come from the
upturn in the oil and gas sector. Gaming, construction and tourism have also
contributed. Future growth should continue to be limited by the state's
dependence on the cyclical oil and gas industry, as well as below average
wealth and income levels and a workforce with a low education level.
Historically, Louisiana's main revenue sources, namely its sales tax,
individual and corporate income tax, and severance and royalty taxes, have
fluctuated with economic cycles. This fluctuation has created budget problems
in the past. During the last several years, however, the state's financial
position has stabilized somewhat. Under a new administration and legislature,
the state adopted budget control measures in 1996. These measures have improved
efficiencies, especially in the state's large health care system, and resulted
in an operating surplus of $161 million for fiscal 1997. A potential problem
for the state's financial position may be its unfunded risk management claims
for judgments against the state, which, as of May 1997, totaled $1.8 billion.
MARYLAND. Maryland's economic base has been well-diversified. The state's
leading employment and income sectors have been services (32.5%), trade (24%)
and government (19.1%). The state's dependence on government has been larger
than most other states due to Maryland's close proximity to Washington D.C.,
and has made Maryland vulnerable to federal budget cuts. At the same time, the
state's manufacturing sector (7.9%) has been smaller than most other states,
although it has been Maryland's most volatile sector. Recently, economic growth
has come mainly from the service, trade, and the combined transportation,
communication and utilities sectors.
Maryland's financial performance has been historically strong. Contributing
factors have included high per capita income levels, a well-educated workforce,
an advanced infrastructure, diversified employment opportunities, and strong
population growth. In each of the last four fiscal years, the state has
generated operating surpluses while building its financial reserves. Debt
service levels have also remained manageable.
Going forward, potential areas of financial stress may come from the state's
$4.8 billion unfunded pension liability and its recent 10% personal income tax
reduction, which is to be phased in over five years. The state hopes to fund
the tax cut with savings from reductions in the size of government, new
revenues from potential economic growth as a result of the tax cut, and from
budget reserves.
MISSOURI. Missouri has historically enjoyed a diversified economy that has
tended to mirror the national economy. Employment and personal income growth,
however, have been above the national average. Over the past three years,
employment has grown at an average annual rate of 2%, while personal income has
increased by an average annual rate of 5.8% over the past two years. At the
same time, the state's unemployment rate of 3.5% has been below the national
average.
Despite declines in its manufacturing sector, trade and services have 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. As of March 1998, S&P estimated that the state's job growth will
continue over the next five years, although at a slower pace due to slow
population growth and a tight labor force. These factors could raise wages and
deter future economic growth.
From a financial standpoint, 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 six consecutive years, increasing in fiscal
1997 to a balance of $1.71 billion. Because of constitutional tax limitations,
however, the state must refund $695 million in excess income tax revenues
collected in fiscal years 1995, 1996 and 1997 to taxpayers.
Fiscal 1998 results are also expected to be positive. Because of the state's
strong economy, recent estimates indicated general revenue growth of 3.3%. This
is down from 5.7% in 1997 as a result of the elimination of the state's sales
tax on food. For fiscal 1999, increased expenditures for new prison
construction, education and further tax reductions could reduce the state's
future financial flexibility.
NORTH CAROLINA. North Carolina recently ranked tenth in the nation in
population, and its employment and personal income growth has consistently been
above national levels. Manufacturing has dominated the state's economy,
providing 24% of employment and ranking North Carolina eighth in the U.S. in
manufacturing employment. This reliance on manufacturing could increase the
state's vulnerability to future recessions.
Historically, North Carolina's financial operations have been relatively
conservative. Income taxes have been the state's main source of revenue and
education its largest expense. In recent years, the state's financial
performance has been positive with operating surpluses in both fiscal 1996 and
1997. This performance has allowed the state to build reserves and enact
various tax relief measures. A budget deficit has been estimated for the first
year of the 1997-1999 biennium, however, which the state has planned to fund
with its reserves.
Nationally, North Carolina has not been considered a wealthy state. Regionally,
however, it has been among the wealthiest states. Low wages, affordable
housing, and a perceived favorable quality of life should help provide positive
long-term development potential for the state.
TEXAS. The Texas economy has continued to diversify and to move away from its
dependence on the volatile oil and gas sector. The state's high-tech sector has
become increasing prominent, and, as of June 1997, was second behind only
California in total jobs and advantages in cost of business. The construction
industry has been the state's fastest growing sector in recent years due in
part to a relatively high rate of net migration to the state. Overall, job
growth has been strong. Since 1990, Texas has added more than $1.4 million new
jobs and has accounted for 11% of all new jobs created in the U.S. Future
growth may come from the state's services sector, which accounted for 27% of
employment as of April 1997.
While overall job growth has been strong, losses in the state's higher paying
oil and gas, and aerospace industries have resulted in slower, although still
positive, personal income growth. On a per capita basis, income levels have
remained below the national level.
Financially, the state's performance has improved since the budget deficits of
the mid-1980s when the oil and gas sector declined. Revenues have continued to
increase as the state's economy has grown. For fiscal 1997, the state relied in
part on general fund reserves to finance operations and expects to do the same
for fiscal 1998. This reliance on existing surpluses to fund expenditures could
create budget problems going forward. In the near future, Texas may encounter
spending pressures from its growing population and from areas such as education
and welfare reform.
The state's debt burden has been relatively modest. In recent years, however,
the state's debt position has grown. The state has also moved away from issuing
debt designed to be self-supporting and towards issuing debt supported by the
general revenue fund. Nonetheless, the state's debt has remained below the
national average on a per capita basis.
VIRGINIA. Virginia's economy has been in a period of transition. Historically
the state has been dependent on the federal government due to Virginia's close
proximity to Washington D.C. Federal downsizing and budget cuts in recent
years, however, have cost the state jobs. As a result, the state has been
actively encouraging diversification. While federal jobs have continued to
account for a larger percentage of employment (5.2% in 1996) relative to the
national average, growth in the services sector has helped replace some of the
losses of federal jobs. In 1996, services accounted for 29.1% of non-farm
employment, with the fastest growth coming from the business and health
services areas. Trade has been another growing sector, increasing 12.6% from
1992 to 1996 and accounting for 22.8% of employment in 1996.
Virginia's debt levels have been historically low, although they have begun to
increase due to some large highway and university construction projects.
Revenues and expenses have likewise grown. After two years of deficits, the
state's GAAP-based unreserved fund balance closed with $220 million in fiscal
1997.
Since 1995, the state has had to refund approximately $400 million of income
tax collected on federal retiree benefits as a result of a court case.
Two-thirds of this amount has been paid and the remainder is scheduled to be
paid in 1998 and 1999. In coming years, the state will also have to fund
increased expenditures for education, as well as the elimination of its car
tax. When fully phased in during fiscal 2003, the cost to the state of the car
tax elimination is expected to be $2.8 billion.
U.S. TERRITORIES RISKS. Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, the ability of U.S. territory
issuers to continue to make principal and interest payments may also affect a
fund's performance. As with state municipal issuers, the ability to make these
payments is dependent on economic, political and other conditions. Below is a
discussion of certain conditions within some of the territories where the
fund's may be invested. It is not a complete analysis of every material fact
that may affect the ability of issuers of U.S. territory municipal securities
to meet their debt obligations or the economic or political conditions within
the territories. It is based on the most recent data available to the funds
from Fitch, Moody's and S&P, and other historically reliable sources, but it
has not been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on its tourism industry, which
accounted for almost 40% of total employment in 1997. It has been especially
dependent on Japanese tourism, which has made Guam vulnerable to fluctuations
in the relationship between the U.S. dollar and the Japanese yen.
In the early to mid 1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a comprehensive
financial plan in June 1995 to help balance the budget and reduce the general
fund deficit by fiscal 1999. As of fiscal 1997, the deficit has improved and
the budget was balanced. It is not yet known, however, whether the goals of the
financial plan will be met.
While Guam's debt burden has been manageable, Guam's ability to maintain
current debt levels may be challenged in the near future. U.S. military
downsizing has reduced the federal presence on the island and may also reduce
federal support for infrastructure projects. At the same time, Guam has faced
increasing pressure to improve its infrastructure to help generate economic
development.
Overall, as of October 1997, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and the need for continued political support
towards the goals of the financial plan.
MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum
wage and immigration laws in an effort to help stimulate industry and the
economy. The islands' minimum wage has been more than $2 per hour below the
U.S. level and tens of thousands of workers have immigrated from various Asian
countries to provide cheap labor for the islands' industries. Recently, the
islands' tourism and apparel industries combined to help increase gross
business receipts from $224 million in 1985 to $2 billion in 1996. Currently,
however, Congress is considering a bill to raise wages and curtail immigration
to the Mariana Islands. If it passes, it could have an adverse affect on the
islands' economy.
PUERTO RICO. Overall, both Moody's and S&P consider Puerto Rico's outlook
stable. The economy has continued to grow and diversify. Much of this growth
has come from the construction, trade and service sectors, which have accounted
for more than 50% of the employment base. Manufacturing has contributed 41% of
the island's gross domestic product and has accounted for 16% of employment.
Despite an increasingly skilled workforce, unemployment has remained high at
12-13%.
Over the past three years, Puerto Rico's financial performance has improved.
Strong revenue growth and more aggressive tax collection procedures have
helped. Fiscal 1997 appeared to be on target, and expectations are that the
fiscal 1998 budget will also be balanced.
Puerto Rico's debt levels have been high but manageable at $2,600 per capita or
12% of expenditures. Going forward, these levels may increase as Puerto Rico
attempts to finance significant capital and infrastructure improvements. Puerto
Rico will also need to address its large unfunded pension liability of more
than $5 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Code. This Code section has given certain U.S. corporations operating in Puerto
Rico significant tax advantages. These incentives have helped considerably with
Puerto Rico's economic growth, especially with the development of its
manufacturing sector. U.S. firms that have benefited from these incentives have
provided a significant portion of Puerto Rico's revenues, employment and
deposits in local financial institutions. The section 936 incentives will be
phased out over a 10-year period ending in 2006. It is hoped that this long
phase-out period will give Puerto Rico sufficient time to lessen the
potentially negative effects of section 936's elimination.
INVESTMENT RESTRICTIONS
Each fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of a fund or (ii) 67%
or more of the shares of a fund present at a shareholder meeting if more than
50% of the outstanding shares of a fund are represented at the meeting in
person or by proxy, whichever is less. Each 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 bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing
the return to shareholders.
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 each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each 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 each fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND PRINCIPAL OCCUPATION
NAME, AGE AND OFFICES WITH THE DURING THE PAST FIVE
ADDRESS TRUST YEARS
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 50 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (65)
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 or trustee,
as the case may be, of 52 of the investment companies in the Franklin Templeton
Group of Funds; and formerly, Director, General Host Corporation (nursery and
craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present); director or trustee of 25 of the investment companies in the
Franklin Templeton Group of Funds; formerly, chairman (1995-1997) and trustee
(1993-1997) of National Child Research Center, assistant to the President of
the United States and Secretary of the Cabinet (1990-1993), general counsel to
the United States Treasury Department (1989-1990) and counselor to the
Secretary and Assistant Secretary for Public Affairs and Public Liaison-United
States Treasury Department (1988-1989).
*Charles B. Johnson (65)
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.; and Franklin Templeton Services, Inc. officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 51 of the investment companies in the Franklin Templeton Group of
Funds; and formerly, Director, General Host Corporation (nursery and craft
centers).
*Rupert H. Johnson, Jr. (57)
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 of the other subsidiaries of Franklin Resources, Inc. and of 54
of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
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 28 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (70)
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),
Spacehab, Inc. (aerospace services); and Real 3D (software); director or
trustee, as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Hambrecht and Quist Group,
Director, H & Q Healthcare Investors and Lockheed Martin Corporation and
President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President 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 officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 54 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, 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
54 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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
54 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (35)
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 (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 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, 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 GROUP OF FUNDS ON
NAME THE TRUST*** OF FUNDS**** WHICH EACH SERVES*****
- --------------------------------------------------------------------------------
Frank H. Abbott, III ... $31,200 $165,937 28
Harris J. Ashton ....... 29,900 344,642 50
S. Joseph Fortunato .... 29,900 361,562 52
David W. Garbellano* ... 14,300 91,317 N/A
Edith Holiday**......... 2,600 72,875 25
Frank W.T. LaHaye ...... 29,900 141,433 28
Gordon S. Macklin ...... 29,900 337,292 50
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended February 28, 1998.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with approximately 170
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 funds 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 April 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the funds: approximately 1,579
shares of the North Carolina 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. Each fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for each fund to buy, hold or
sell and the selection of brokers through whom each 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 each fund's investment activities.
Advisers and its officers, directors and employees are covered by fidelity
insurance for the protection of each 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 each fund. Similarly,
with respect to each 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 funds 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 funds' Code of
Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, each 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 each fund for the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996.
MANAGEMENT FEES PAID
1998 1997 1996
- -----------------------------------------------------
Alabama Fund $ 1,189,527 $1,079,285 $1,025,448
Florida Fund 7,419,693 6,567,507 6,180,348
Georgia Fund 872,451 812,505 744,453
Kentucky Fund 81,200* 66,255* 49,195*
Louisiana Fund 758,170 692,158 655,033
Maryland Fund 1,166,952 1,033,178 954,307
Missouri Fund 1,574,188 1,416,882 1,318,581
North Carolina Fund 1,566,067 1,410,760 1,292,366
Texas Fund 770,725 762,188 776,321
Virginia Fund 1,689,780 1,519,947 1,441,960
*For the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, management fees, before any advance waiver, totaled $304,904,
$260,610 and $223,931, respectively. Under an 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,
1999. 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 on 30 days' written notice to Advisers, or by
Advisers on 30 days' written notice to the fund, 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 each 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 $1.2 billion.
The table below shows the administration fees paid to FT Services for the
fiscal years ended February 28, 1998 and 1997. These fees are paid by Advisers.
They are not a separate expense of the funds.
ADMINISTRATION FEES PAID
1998 1997*
- --------------------------------------------------------------------
Alabama Fund ...............................$ 315,821 $ 121,584
Florida Fund ............................... 1,761,352 691,407
Georgia Fund ............................... 223,366 88,065
Kentucky Fund .............................. 72,518 26,745
Louisiana Fund ............................. 188,768 72,596
Maryland Fund .............................. 309,059 116,248
Missouri Fund .............................. 424,634 163,365
North Carolina Fund ........................ 422,191 161,088
Texas Fund ................................. 193,355 79,386
Virginia Fund .............................. 458,682 174,841
*For the period October 1, 1996 through February 28, 1997.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these services
per benefit plan participant fund account per year may not exceed the per
account fee payable by the fund to Investor Services in connection with
maintaining shareholder accounts.
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
each 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 funds' independent auditors. During the fiscal year
ended February 28, 1998, 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, 1998.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the funds are principal transactions at net prices, the
funds incur little or no brokerage costs. The funds deal directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on their 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
funds do not buy bonds in underwritings where they are given no choice, or only
limited choice, in the designation of dealers to receive the commission. The
funds seek 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 funds'
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 funds' portfolio transactions.
If purchases or sales of securities of the funds 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 funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, the funds paid no brokerage commissions.
As of February 28, 1998, the funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their 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 funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of the funds 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 a 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 funds'
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 funds 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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
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 the amount of your total purchases,
less redemptions, equals the amount specified under the Letter, the reserved
shares will be deposited to an account in your name or delivered to you or as
you direct. If the amount of your total purchases, less redemptions, exceeds
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 amount of your total purchases,
less redemptions, is 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 each 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 goals
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. 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. Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the 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 funds do 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 funds 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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 a 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 funds on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners. For
each beneficial owner in the omnibus account, a 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 close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading. As
of the date of this SAI, the funds are informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. 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 each 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 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 close of the NYSE that will not be reflected in the
computation of the 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 funds may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of the
Code, each fund has qualified and continues to qualify to pay "exempt-interest
dividends" to shareholders. These dividends are derived from interest income
exempt from regular federal income tax, and are not subject to regular federal
income tax when they are distributed. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of a state
or its political subdivisions, or from interest on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands or Guam), they will also be exempt from that state's personal income
taxes. A state generally does not grant tax-free treatment to interest on state
and municipal securities of other states.
At the end of each calendar year, each fund in which you are a shareholder will
provide you with the percentage of any dividends paid that may qualify for
tax-free treatment on your personal income tax return. You should consult with
your personal tax advisor to determine the application of your state and local
laws to these distributions. Corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes. For more information, please see
"Appendices - State Tax Treatment."
A fund may earn taxable income on any temporary investments, on the discount
from stripped obligations or their coupons, on income from securities loans or
other taxable transactions, on the excess of short-term capital gains over
long-term capital losses earned by the fund ("net short-term capital gain"), or
on ordinary income derived from the sale of market discount bonds. Any
distributions by a fund from such income will be taxable to you as ordinary
income, whether you take them in cash or additional shares.
From time to time, a fund may buy a tax-exempt bond in the secondary market for
a price that is less than the principal amount of the bond. This discount is
called market discount if it exceeds a de minimis amount of discount under the
Code. For market discount bonds purchased after April 30, 1993, a portion of
the gain on sale or disposition (not to exceed the accrued portion of market
discount at the time of the sale) is treated as ordinary income rather than
capital gain. Any distribution by a fund of market discount income will be
taxable as ordinary income to you. A fund may elect in any fiscal year not to
distribute to you its taxable ordinary income and to pay a federal income or
excise tax on this income at the fund level. In any case, the amount of market
discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions 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 gains realized by a fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by a fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or
higher federal income tax brackets, and at a maximum rate of 10% for investors
in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than five years that are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities that are purchased after December 31, 2000 and are
held for more than five years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
Each fund in which you are a shareholder will advise you at the end of each
calendar year of the amount of its capital gain distributions paid during the
calendar year that qualify for these maximum federal tax rates. Additional
information on reporting these distributions on your personal income tax
returns is available in Franklin Templeton's Tax Information Handbook. This
handbook has been revised to include 1997 Act tax law changes. Please call Fund
Information to request a copy. Questions about your personal tax reporting
should be addressed to your personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if any,
which are declared in October, November or December to shareholders of record
in such month, and paid to you in January of the following year, will be
treated for tax purposes as if they had been received by you on December 31 of
the year in which they were declared. A fund will report this income to you on
your Form 1099-DIV for the year in which these distributions were declared. You
will receive a Form 1099-DIV only for calendar years in which a fund has made a
distribution to you of taxable ordinary income or capital gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you are a
shareholder will inform you of the amount and character of your distributions
at the time they are paid, and will shortly after the close of each calendar
year advise you of the tax status for federal income tax purposes of such
distributions, including the portion of the distributions that on average
comprise taxable income or interest income that is a tax preference item under
the alternative minimum tax. If you have not held fund shares for a full year,
you may have designated as taxable, tax-exempt or as a tax preference a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has elected
to be treated as a regulated investment company under Subchapter M of the Code,
has qualified as such for its most recent fiscal year, and intends to so
qualify during the current fiscal year. The Board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the fund's available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, each
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total
assets, and, with respect to 50% of a fund's total assets, no investment
(other than cash and cash items, U.S. government securities and
securities of other regulated investment companies) can exceed 5% of the
fund's total assets;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute at
least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be disallowed
to the extent of any exempt-interest dividends distributed to you with respect
to your shares in a fund and any remaining loss will be treated as a long-term
capital loss to the extent of any long-term capital gains distributed to you by
a fund on those shares. The holding periods and categories of capital gain that
apply under the 1997 Act are described above in the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your 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
your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in the fund or
in another of the Franklin Templeton Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated. The portion of
the sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because each fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the funds for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans) issued
after August 7, 1986, while still exempt from regular federal income tax, is a
preference item for taxpayers in determining their alternative minimum tax
under the Code and under the income tax provisions of several states. Private
activity bond interest could subject you to or increase your liability under
federal and state alternative minimum taxes, depending on your individual or
corporate tax position.
Consistent with each fund's investment goals, each fund may acquire such
private activity bonds if, in Advisers' opinion, such bonds represent the most
attractive investment opportunity then available to the fund. Persons who are
defined in the Code as "substantial users" (or persons related to such users)
of facilities financed by private activity bonds should consult with their tax
advisors before buying shares in the fund.
The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as on
activities financed by certain industrial development or private activity
bonds. Some of these bonds, including bonds for sports arenas, parking
facilities, and pollution control facilities, are generally not tax-exempt
because they generally do not pay tax-exempt interest.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To the
extent a fund invests in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by a fund. Bonds acquired in the secondary market
for a price less than their stated redemption price, or revised issue price in
the case of a bond having OID, are said to have been acquired with market
discount. For these bonds, a fund may elect to accrue market discount on a
current basis, in which case the fund will be required to distribute any such
accrued discount. If a fund does not elect to accrue market discount into
income currently, gain recognized on sale will be recharacterized as ordinary
income instead of capital gain to the extent of any accumulated market discount
on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, a fund may
be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each 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 each 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, 1998, February 28, 1997 and February 29, 1996.
AMOUNT RECEIVED
TOTAL AMOUNT IN CONNECTION
COMMISSIONS RETAINED BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
1998
Alabama Fund ................. $893,841 $55,956 $3,262
Florida Fund ................. 6,501,473 424,153 7,601
Georgia Fund ................. 705,553 42,875 1,464
Kentucky Fund ................ 354,892 24,682 0
Louisiana Fund ............... 568,856 37,815 1,321
Maryland Fund ................ 1,009,222 62,026 3,096
Missouri Fund ................ 1,652,316 103,117 3,562
North Carolina Fund .......... 1,557,597 95,185 6,473
Texas Fund ................... 310,914 20,220 1,447
Virginia Fund ................ 93,973 93,973 3,561
1997
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 --
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 funds for acting as underwriter.
THE RULE 12B-1 PLANS
Each fund and class have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLANS. Under the Class I plan of each fund, 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 plans, the Board has determined that the annual
fees payable under each 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 plans,
each 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 plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, each 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 plans, each 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. 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, 1998, 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:
CLASS I CLASS II
DISTRIBUTORS' AMOUNT DISTRIBUTORS'AMOUNT
ELIGIBLE PAID BY ELIGIBLE PAID BY
EXPENSES FUND EXPENSES FUND
Alabama Fund ........... $ 203,550 $ 176,892 $ 79,802 $ 46,584
Florida Fund ........... 1,698,650 1,325,976 487,692 243,396
Georgia Fund ........... 187,475 127,617 70,090 37,292
Kentucky Fund .......... 84,821 45,782 -- --
Louisiana Fund ......... 138,237 103,194 32,363 23,271
Maryland Fund .......... 224,477 181,420 78,329 47,025
Missouri Fund .......... 327,445 250,051 77,948 42,288
North Carolina Fund .... 294,671 247,183 152,842 87,068
Texas Fund ............. 147,511 104,993 16,706 7,455
Virginia Fund .......... 314,184 266,024 101,064 61,033
HOW DO THE FUNDS 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 a 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 funds 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 funds 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 the periods indicated below,
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 period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for each class for the indicated periods ended
February 28, 1998, was as follows:
AVERAGE ANNUAL TOTAL RETURN
INCEPTION ONE- FIVE- TEN- FROM
DATE YEAR YEAR YEAR INCEPTION
Alabama Fund - Class I ....... 09/01/87 4.17% 5.53% 7.46% 7.66%
Alabama Fund - Class II ...... 05/01/95 6.15 -- -- 7.20
Florida Fund - Class I ....... 09/01/87 3.80 5.46 7.50 7.84
Florida Fund - Class II ...... 05/01/95 5.71 -- -- 6.84
Georgia Fund - Class I ....... 09/01/87 3.14 5.24 7.35 7.57
Georgia Fund - Class II ...... 05/01/95 5.13 -- -- 6.48
Kentucky Fund ................ 10/12/91 4.74 5.71 -- 7.14
Louisiana Fund - Class I ..... 09/01/87 3.87 5.08 7.38 7.54
Louisiana Fund - Class II .... 05/01/95 5.99 -- -- 7.02
Maryland Fund - Class I ...... 10/03/88 3.69 5.46 -- 7.21
Maryland Fund - Class II ..... 05/01/95 5.59 -- -- 7.15
Missouri Fund - Class I ...... 09/01/87 4.73 5.76 7.70 7.75
Missouri Fund - Class II ..... 05/01/95 6.88 -- -- 7.31
North Carolina Fund - Class I 09/01/87 4.17 5.13 7.37 7.63
North Carolina Fund - Class II 05/01/95 6.14 -- -- 6.92
Texas Fund - Class I ......... 09/01/87 4.32 5.46 7.54 7.81
Texas Fund - Class II ........ 05/01/95 6.20 -- -- 7.37
Virginia Fund - Class I ...... 09/01/87 3.89 5.37 7.45 7.67
Virginia Fund - Class II ..... 05/01/95 5.88 -- -- 6.89
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
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, is based on
the actual return for a specified period rather than on the average return over
the periods indicated above. The cumulative total return for each class for the
indicated periods ended February 28, 1998, was as follows:
CUMULATIVE TOTAL RETURN
INCEPTION ONE- FIVE- TEN- FROM
DATE YEAR YEAR YEAR INCEPTION
Alabama Fund - Class I ....... 09/01/87 4.17% 30.87% 105.38% 117.03%
Alabama Fund - Class II ...... 05/01/95 6.15 -- -- 21.77
Florida Fund - Class I ....... 09/01/87 3.80 30.43 106.02 120.90
Florida Fund - Class II ...... 05/01/95 5.71 -- -- 20.60
Georgia Fund - Class I ....... 09/01/87 3.14 29.07 103.26 115.00
Georgia Fund - Class II ...... 05/01/95 5.13 -- -- 19.45
Kentucky Fund ................ 10/12/91 4.74 31.98 -- 55.27
Louisiana Fund - Class I ..... 09/01/87 3.87 28.10 103.88 114.36
Louisiana Fund - Class II .... 05/01/95 5.99 -- -- 21.19
Maryland Fund - Class I ...... 10/03/88 3.69 30.43 -- 92.48
Maryland Fund - Class II ..... 05/01/95 5.59 -- -- 21.60
Missouri Fund - Class I ...... 09/01/87 4.73 32.33 110.03 118.81
Missouri Fund - Class II ..... 05/01/95 6.88 -- -- 22.11
North Carolina Fund - Class I 09/01/87 4.17 28.42 103.69 116.37
North Carolina Fund - Class II 05/01/95 6.14 -- -- 20.86
Texas Fund - Class I ......... 09/01/87 4.32 30.42 106.85 120.18
Texas Fund - Class II ........ 05/01/95 6.20 -- -- 22.31
Virginia Fund - Class I ...... 09/01/87 3.89 29.91 105.08 117.28
Virginia Fund - Class II ..... 05/01/95 5.88 -- -- 20.75
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
a 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, 1998, was as follows:
YIELD
CLASS I CLASS II
Alabama Fund ........... 4.06% 3.64%
Florida Fund ........... 4.10 3.69
Georgia Fund ........... 3.90 3.47
Kentucky Fund .......... 4.44 --
Louisiana Fund ......... 4.16 3.73
Maryland Fund .......... 4.10 3.68
Missouri Fund .......... 4.06 3.64
North Carolina Fund .... 4.05 3.63
Texas Fund ............. 4.01 3.58
Virginia Fund .......... 4.15 3.73
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, 1998, was as follows:
TAXABLE-
EQUIVALENT YIELD
CLASS I CLASS II
Alabama Fund ........... 7.08% 6.34%
Florida Fund ........... 6.79 6.11
Georgia Fund ........... 6.87 6.11
Kentucky Fund .......... 7.82 --
Louisiana Fund ......... 7.33 6.57
Maryland Fund .......... 7.33 6.58
Missouri Fund .......... 7.15 6.41
North Carolina Fund .... 7.27 6.52
Texas Fund ............. 6.64 5.93
Virginia Fund .......... 7.29 6.55
As of February 28, 1998, the combined federal and state income tax rates upon
which the taxable-equivalent yield quotations are based were as follows:
COMBINED
RATE*
Alabama ................ 42.6%
Florida ................ 39.6
Georgia ................ 43.2
Kentucky ............... 43.2
Louisiana .............. 43.2
Maryland ............... 44.1**
Missouri ............... 43.2
North Carolina ......... 44.3
Texas .................. 39.6
Virginia ............... 43.1
*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 funds will be updated to
reflect these changes. The funds expect updates may be necessary as tax rates
are changed by federal and state governments. The advantage of tax-free
investments, like the funds, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the funds.
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. 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, 1998, was as follows:
CURRENT
DISTRIBUTION RATE
CLASS I CLASS II
Alabama Fund ........... 5.08% 4.67%
Florida Fund ........... 5.03 4.60
Georgia Fund ........... 4.93 4.50
Kentucky Fund .......... 5.02 --
Louisiana Fund ......... 5.14 4.73
Maryland Fund .......... 4.84 4.41
Missouri Fund .......... 4.89 4.48
North Carolina Fund .... 4.84 4.42
Texas Fund ............. 5.02 4.55
Virginia Fund .......... 4.93 4.52
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, 1998, was as follows:
TAXABLE-
EQUIVALENT
DISTRIBUTION RATE
CLASS I CLASS II
Alabama Fund ........... 8.85% 8.14%
Florida Fund ........... 8.33 7.62
Georgia Fund ........... 8.68 7.93
Kentucky Fund .......... 8.84 --
Louisiana Fund ........ 9.05 8.33
Maryland Fund .......... 8.66 7.89
Missouri Fund .......... 8.61 7.89
North Carolina Fund .... 8.69 7.94
Texas Fund ............. 8.31 7.53
Virginia Fund .......... 8.66 7.94
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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 funds may include in their advertising or sales material information
relating to investment goals 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 funds may satisfy your
investment goal, advertisements and other materials about the funds 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 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
e) Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 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 CS 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. 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 funds 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 fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of a fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the funds' portfolios, 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 50 years
and now services more than 3 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, a pioneer in international
investing. The Mutual Series team, 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 $232 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. Each 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
$48 billion in municipal bond assets for over three quarters of a million
investors. According to Research and Ratings Review, Franklin had one of the
largest staffs of municipal securities analysts in the industry, as of March
31, 1997.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1998, taxes could cost almost
$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
1998). Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected based on their
yield, quality and maturity. An investment in a Franklin tax-free fund can
provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the Net Asset Value of an investment
in a fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the funds 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.
According to Strategic Insight, dated February 28, 1998, 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 April 2, 1998, the principal shareholders of the funds, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
TEXAS FUND - CLASS II
Family Ltd. Partnership
Alo Family Limited
4512 Teas St.
Bellaire, TX 77401-4223 22,532.108 11.3%
NFSC FEBO OKS-140848
Melinda Rayl Ttee
The Rayl Revoc Trust
U/A 4-20-87
154 Red Oak Lane
Flower Mound, TX 75028 16,750.419 8.4%
First Southwest Company FBO
Ethan W. & Grace C. Dodgen
25063473
1700 Pacific Ave., Suite 500
Dallas, TX 75201-4652 18,943.830 9.5%
Arnold F. Graham
701 Rimrock
Kerrville, TX 78028 11,460.720 5.7%
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
funds' Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of a fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of a fund's assets if you are held personally liable for
obligations of a fund. The Declaration of Trust provides that a fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of a fund and satisfy any judgment thereon. All such rights are
limited to the assets of the fund. The Declaration of Trust further provides
that a 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 a 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, each 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 and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) 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, 1998, 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 funds' 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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 funds dated July 1, 1998, 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 that 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 that suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. 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. These 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 and 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" 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 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 each 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 TAX TREATMENT
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
FRANKLIN ARIZONA TAX-FREE INCOME FUND
FRANKLIN COLORADO TAX-FREE INCOME FUND
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
FRANKLIN HIGH YIELD 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
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?..........................
What Are the Risks of Investing in the Funds? .................
Investment Restrictions........................................
Officers and Trustees..........................................
Investment Management and Other Services.......................
How Do the Funds Buy Securities for Their Portfolios?..........
How Do I Buy, Sell and Exchange Shares?........................
How Are Fund Shares Valued?....................................
Additional Information on
Distributions and Taxes.......................................
The Funds' Underwriter.........................................
How Do the Funds Measure Performance?..........................
Miscellaneous Information......................................
Financial Statements...........................................
Useful Terms and Definitions...................................
Appendices.....................................................
Description of Ratings........................................
State Tax Treatment...........................................
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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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The funds are series of the Franklin Tax-Free Trust (the "Trust"), an
open-end management investment company. The Prospectus, dated July 1, 1998,
which we may amend from time to time, contains the basic information you
should know before investing in the funds. For a free copy, call 1-800/DIAL
BEN.
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
EACH 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 DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of the FEDERAL INTERMEDIATE FUND is to provide investors
with as high a level of income exempt from federal income taxes, including
the individual alternative minimum tax, as is consistent with prudent
investing, while seeking preservation of shareholders' capital.
The investment goal of the HIGH YIELD FUND is to provide investors with a
high current yield exempt from federal income taxes. As a secondary goal, the
High Yield Fund seeks capital appreciation to the extent possible and
consistent with its principal investment goal.
The investment goal of the PUERTO RICO FUND is to provide investors with as
high a level of income exempt from federal income taxes as is consistent with
prudent investing while seeking preservation of shareholders' capital. The
Puerto Rico Fund also seeks to provide a maximum level of income that is free
from the personal income taxes of a majority of states, although this policy
is not a fundamental investment goal of the fund.
The investment goal of EACH STATE FUND 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 fund's state as is
consistent with prudent investing, while seeking preservation of
shareholders' capital.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
The following gives more detailed information about each fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUNDS BUY
Each fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
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-free under
the laws of that state, in order for any portion of the fund's distributions
to be free from the state's personal income taxes. If a fund's state requires
this, the fund will try to invest its assets as required so that its
distributions will be free from personal income taxes for resident
shareholder's of the fund's 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 (i) eliminate unsafe investments and investments that
are not consistent with the preservation of capital or the tax status of the
fund; (ii) honor redemption requests, meet anticipated redemption
requirements and negate gains from discount purchases; (iii) reinvest the
earnings from securities in like securities; or (iv) defray normal
administrative expenses.
Below is a description of various types of municipal and other securities
that each fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which each fund
may also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
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 are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
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.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, 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. For example, 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. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest 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.
VARIABLE OR FLOATING RATE SECURITIES. Each fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. Each fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews a
fund's municipal lease obligations to assure that they are liquid investments
based on various factors reviewed by the Manager and monitored by the Board.
These factors include (a) the credit quality of the obligations and the
extent to which they are rated or, if unrated, comply with existing criteria
and procedures followed to ensure that they are comparable in quality to the
ratings required for the fund to invest, including an assessment of the
likelihood of the lease being canceled, taking into account how essential the
leased property is and the term of the lease compared to the useful life of
the leased property; (b) the size of the municipal securities market, both in
general and with respect to municipal lease obligations; and (c) the extent
to which the type of municipal lease obligations 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.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, each
fund, except the High Yield Fund, believes that this risk may be reduced,
although not eliminated, by its policies on the quality of securities in
which it may invest. Keeping in mind that each fund can invest in municipal
lease obligations without percentage limits, the funds' holdings in municipal
lease obligations were:
AS OF FEBRUARY 28, 1998
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(AS A PERCENTAGE OF NET ASSETS)
Arizona Fund 3.44%
Colorado Fund 4.92%
Connecticut Fund 0.00%
Federal Intermediate Fund 9.43%
High Yield Fund 5.86%
Indiana Fund 6.91%
Michigan Fund 0.00%
New Jersey Fund 4.89%
Oregon Fund 2.34%
Pennsylvania Fund 0.36%
Puerto Rico Fund 0.00%
CALLABLE BONDS. Each fund may invest in callable bonds, which allow the
issuer to repay some or all of the bonds ahead of schedule. If a bond is
called, the fund will receive the principal amount, the accrued interest, and
a small additional payment as a call premium. The Manager may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. If the fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the fund also may not be
able to recover the full amount it paid for the bond. One way for a fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
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 a fund's callable bonds
may impact the fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by the Manager, the
fund believes it has reduced the risk of an adverse impact on its Net Asset
Value from calls of callable bonds. In light of each fund's pricing policies
and certain amortization procedures required by the IRS, the funds do not
expect to suffer any material adverse impact related to the value at which
they have carried the bonds in connection with calls of bonds purchased at a
premium. As with any investment strategy, however, there is no guarantee that
a call may not have a more substantial impact than anticipated.
Notwithstanding the call feature, an investment in callable bonds by the
Federal Intermediate Fund is subject to its policy of maintaining a
dollar-weighted average portfolio maturity of three to 10 years.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. Each 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
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. 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 receive 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.
An investment in zero-coupon and delayed interest securities may cause a fund
to recognize income and make distributions to shareholders before it receives
any cash payments on its investment. To generate cash to satisfy distribution
requirements, a fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as
the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. Each 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 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 is a promissory note issued by a corporation to finance its
short-term credit needs.
MORE INFORMATION ABOUT SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by a fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When a 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 funds believe that their Net
Asset Value or income will not be negatively affected by their purchase of
municipal securities on a when-issued basis. The funds will not engage in
when-issued transactions for investment leverage purposes.
Although a fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When a
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. If assets
of a fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
ILLIQUID INVESTMENTS. Each fund may invest up to 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.
DIVERSIFICATION. All of the funds, except the Connecticut, Federal
Intermediate and Michigan funds, are diversified funds. The Connecticut,
Federal Intermediate and Michigan funds are non-diversified. 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 are not
generally considered an obligation of the original municipality when
determining diversification.
Each fund, including the Connecticut, Federal Intermediate and Michigan
funds, intends to meet certain diversification requirements for tax purposes.
These requirements are discussed under "Additional Information on
Distributions and Taxes."
Each fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for each fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
The following gives more information about the risks of investing in the
funds. Please read this information together with the section "What Are the
Risks of Investing in the Funds?" in the Prospectus.
STATE RISKS. Since each state fund mainly invests in the municipal securities
of its state, its performance is closely tied to the ability of issuers of
municipal securities in its state to continue to make principal and interest
payments on their securities. The issuers' ability to do this is in turn
dependent on economic, political and other conditions within the state. Below
is a discussion of certain conditions that may affect municipal issuers in
the funds' various states. It is not a complete analysis of every material
fact that may affect the ability of issuers of municipal securities to meet
their debt obligations or the economic or political conditions within any
state. The information below is based on the most recent data available to
the funds from Fitch, Moody's and S&P, three historically reliable sources,
but the funds have not independently verified it.
The ability of issuers of municipal securities to continue to make principal
and interest payments is dependent in large part on their ability to raise
revenues, primarily through taxes, and to control spending. Many factors can
affect a state's revenues including the rate of population growth,
unemployment rates, personal income growth, federal aid, and the ability to
attract and keep successful businesses. A number of factors can also affect a
state's spending including current debt levels, and the existence of
accumulated budget deficits. The following provides some information on these
and other factors.
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
strong, the rate of growth has slowed since 1996 as a result of California's
economic recovery and thus less migration from that state. Employment growth
has also been strong, at 5.6% in 1996. Driven recently by gains in the
high-tech manufacturing sector, employment growth is expected to remain solid
over the near-term. Unemployment was 4.7% in May 1997, slightly less than the
national average.
Arizona's economy has continued its shift away from agriculture and mining
and towards manufacturing and services. The move away from farming, which
generally consumes about 80% of the water used in the state, may increase the
water available for municipal uses. As of July 1997, manufacturing accounted
for approximately 9.3% of the state's total employment, trade 23%, services
30%, government 13%, construction 6% and finance, insurance and real estate
8%.
Under its constitution, Arizona is not allowed to issue general obligation
debt. Thus, gross state debt levels have remained moderate. The state has
historically relied on lease obligations, revenue bonds, and pay-as-you-go
financing for its capital needs. A significant portion of the state's debt
has been supported by motor fuel taxes and highway user fees.
Recently, Arizona's strong economic growth has enabled the state to replenish
its general fund, while at the same time cutting taxes. At the end of fiscal
1996, the general fund had a balance of 12.6% of expenditures, up from 6.9%
at the end of fiscal 1995. Due to higher-than-anticipated income tax
receipts, the state expects the general fund balance will remain strong
through fiscal 1998. In addition, the state's budget stabilization fund held
$252 million as of July 1997, which may help provide protection in an
economic downturn.
Despite periods of financial stress during the 1980s and early 1990s, the
state's financial outlook is generally considered stable.
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,
and unemployment levels have been below the national average. As of June
1997, S&P expected this growth to continue, although at a slower rate.
The recent strength of Colorado's economy has helped to improve the state's
financial position. Revenue growth has continued to exceed projections,
primarily in the area of income tax collections. Since Colorado's
constitution prohibits the issuance of general obligation debt, the state's
debt burden has been low. The state has relied primarily on pay-as-you-go and
lease financing to meet its capital improvement needs.
Colorado's relatively strong economy and improved financial position,
together with its relatively low debt ratios, should help its 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,
however, Connecticut has begun to show some signs of progress.
For the first time in several years, the state's population grew in 1996,
although by a modest 0.1%. For the twelve months ended August 1997, non-farm
employment grew by 1.8%, led by growth in wholesale and retail trade,
services, construction and government. The state's tourism industry has also
grown steadily due to the state's growing casino industry. Furthermore, the
state has recently been successful in attracting businesses to the state from
New York City due to tax incentives and lower office rents. Future growth is
expected to come from the areas of business services, media and
communications, and biopharmaceuticals. While Connecticut has yet to reach
prerecession employment levels, it has remained the richest state in the U.S.
with per capita income at 137% of the national average as of October 1997.
Recent unemployment rates have also compared favorably to the nation.
As of October 1997, the state expected to end fiscal 1997 with a general fund
surplus of $255 million, its sixth consecutive surplus since its $809 million
deficit in fiscal 1991. Debt levels have remained high, however, although
annual general obligation bond issuance has declined since the early 1990s.
The state's high debt levels could affect its future financial flexibility.
With projections of slow economic growth through the year 2000 and the
implementation of planned tax cuts, Connecticut may face challenges as it
attempts to maintain balanced operations.
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 15 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.
The recent strength of Indiana's economy and aggressive spending cuts have
resulted in four consecutive years of operating surpluses. As of June 30,
1997, the state's total balances were $1.8 billion, which ranked it among the
strongest states nationally. This compared favorably to total balances of
$670 million at June 30, 1993.
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 $7 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. Michigan's economy has continued to rely on national economic
trends, especially the demand for durable goods. Its economic base has been
dependent on its manufacturing sector, which recently accounted for 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. In recent years, however, the state has
made some improvements in the diversity of its economy.
Michigan's finances have also improved since the early 1990s when the state's
financial position was weakened by the national recession and imbalances in
the budget. Tighter budget controls and the positive effect on revenues of
the state's relatively strong economy have allowed the state to replenish
reserves, which had been severely depleted during the early 1990s. The
state's budget stabilization fund was estimated at more than $1.2 billion at
September 30, 1997. Michigan may need the increased stability these reserve
levels provide to offset higher school funding requirements, which were
estimated at $8.6 billion in fiscal 1997 and represented the largest expense
item for the state.
NEW JERSEY. New Jersey's economy has historically been one of the most
diverse in the nation. Recent economic growth has been slower than the
national average, however, by most measures. The state recently recovered its
job losses from the recession of the early 1990s, when the state experienced
extensive layoffs in manufacturing and construction leading to the
elimination of 6.3% of the state's jobs. Recent growth has been strongest in
the service and trade sectors, while manufacturing has continued to decline.
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. While personal income growth
has been slower than at the national level, New Jersey has remained one of
the wealthiest states, recently ranking second in per capita income to
Connecticut.
The state's financial position has benefited from the underlying health of
New Jersey's economy, which has resulted in increased corporate business and
personal income tax receipts. The state ended fiscal 1997 with a surplus and
an undesignated fund balance of $1 billion, although the state anticipates
using part of this balance to fund fiscal 1998 operations. While the state's
expenditures have been restrained, nonrecurring revenues and budget surpluses
have been needed to balance budgets in recent years. Together with the need
to fund its 30% reduction in personal income taxes, the state may face future
fiscal challenges, especially if its economy does not continue to grow at a
relatively healthy rate.
OREGON. In recent 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 26.1% of total non-farm employment and much of the state's
employment growth. Pacific Rim trade, 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 likely to be 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, voter initiatives have limited the
state's financial flexibility.
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 May 20, 1997, voters passed ballot measure 50, which replaced ballot
measure 47. Ballot measure 50 could negatively impact the revenue-raising
flexibility of many municipal entities in Oregon. The state may also be
negatively affected as this measure requires the state to indemnify school
districts from the impact of property tax cuts.
As of September 1997, the state had estimated that it would end fiscal 1997
with a budget balance of more than $700 million. New capital programs,
especially for correction facilities, and the uncertain effects on state and
local governments of Measure 50, however, 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. Pennsylvania's economic base has been diverse, although it has
also been highly cyclical. The largest growth areas have been business,
health care, and consumer services. Growth in these areas have helped to
offset declines in the manufacturing, mining, and federal government sectors.
Overall, employment growth has been slower than the national level, at 5.7%
since 1989 compared to the national average of 13.3%.
Pennsylvania's governor has recently made economic development a priority. To
attract new business, the state has implemented various business tax cuts and
has attempted to ease the state's regulatory environment. These steps,
together with the state's strong education, health care and transportation
systems, could help to provide a positive environment for attracting
businesses.
Pennsylvania's financial performance has been historically tied to
fluctuations in both national and regional economic trends. For fiscal 1997,
improvements in the state's economy and higher-than-expected tax revenues
helped strengthen the state's financial position. The state ended fiscal 1997
with an operating surplus of more than $400 million. Relative to the size of
the budget, the state's reserves nonetheless have remained relatively small.
Due to the cyclical nature of the state's economy and financial performance,
the state's small reserves do not provide much security against future
economic downturns or other uncertainties that could affect the state.
Additionally, the state may need to address some outstanding and potentially
costly litigation issues over the next several years, including possible
changes in the funding of the state's school system and the state's judicial
system.
U.S. TERRITORIES RISKS. Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, and the Puerto Rico Fund
invests mainly in Puerto Rico municipal securities, the ability of U.S.
territory issuers to continue to make principal and interest payments may
also affect a fund's performance. As with state municipal issuers, the
ability to make these payments is dependent on economic, political and other
conditions.
Below is a discussion of certain conditions within some of the territories
where the fund's may be invested. It is not a complete analysis of every
material fact that may affect the ability of issuers of U.S. territory
municipal securities to meet their debt obligations or the economic or
political conditions within the territories. It is based on the most recent
data available to the funds from Fitch, Moody's and S&P, and other
historically reliable sources, but it has not been independently verified by
the funds.
GUAM. Guam's economy has been heavily dependent on its tourism industry,
which accounted for almost 40% of total employment in 1997. It has been
especially dependent on Japanese tourism, which has made Guam vulnerable to
fluctuations in the relationship between the U.S. dollar and the Japanese yen.
In the early to mid 1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a
comprehensive financial plan in June 1995 to help balance the budget and
reduce the general fund deficit by fiscal 1999. As of fiscal 1997, the
deficit has improved and the budget was balanced. It is not yet known,
however, whether the goals of the financial plan will be met.
While Guam's debt burden has been manageable, Guam's ability to maintain
current debt levels may be challenged in the near future. U.S. military
downsizing has reduced the federal presence on the island and may also reduce
federal support for infrastructure projects. At the same time, Guam has faced
increasing pressure to improve its infrastructure to help generate economic
development.
Overall, as of October 1997, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and the need for continued political
support towards the goals of the financial plan.
MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum
wage and immigration laws in an effort to help stimulate industry and the
economy. The islands' minimum wage has been more than $2 per hour below the
U.S. level and tens of thousands of workers have immigrated from various
Asian countries to provide cheap labor for the islands' industries. Recently,
the islands' tourism and apparel industries combined to help increase gross
business receipts from $224 million in 1985 to $2 billion in 1996. Currently,
however, Congress is considering a bill to raise wages and curtail
immigration to the Mariana Islands. If it passes, it could have an adverse
affect on the islands' economy.
PUERTO RICO. Overall, both Moody's and S&P recently considered Puerto Rico's
outlook stable. The economy has continued to grow and diversify. Much of this
growth has come from the construction, trade and service sectors, which have
accounted for more than 50% of the employment base. Manufacturing has
contributed 41% of the island's gross domestic product and has accounted for
16% of employment. Despite an increasingly skilled workforce, unemployment
has remained high at 12-13%.
Over the past three years, Puerto Rico's financial performance has improved.
Strong revenue growth and more aggressive tax collection procedures have
helped. Fiscal 1997 appeared to be on target, and expectations are that the
fiscal 1998 budget will also be balanced.
Puerto Rico's debt levels have been high but manageable at $2,600 per capita
or 12% of expenditures. Going forward, these levels may increase as Puerto
Rico attempts to finance significant capital and infrastructure improvements.
Puerto Rico will also need to address its large unfunded pension liability of
more than $5 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Code. This Code section has given certain U.S. corporations operating in
Puerto Rico significant tax advantages. These incentives have helped
considerably with Puerto Rico's economic growth, especially with the
development of its manufacturing sector. U.S. firms that have benefited from
these incentives have provided a significant portion of Puerto Rico's
revenues, employment and deposits in local financial institutions. The
section 936 incentives will be phased out over a 10-year period ending in
2006. It is hoped that this long phase-out period will give Puerto Rico
sufficient time to lessen the potentially negative effects of section 936's
elimination.
CREDIT RISK - HIGH YIELD FUND ONLY. Since the High Yield Fund may invest in
municipal securities rated 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.
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. Factors adversely
affecting the market value of high yield securities may lower the fund's Net
Asset Value.
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.
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.
INVESTMENT RESTRICTIONS
Each fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of a fund or (ii)
67% or more of the shares of a fund present at a shareholder meeting if more
than 50% of the outstanding shares of a fund are represented at the meeting
in person or by proxy, whichever is less. Each 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 and Federal Intermediate 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. For the fund except the Federal Intermediate Fund, 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. For each fund except the Federal Intermediate Fund, 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.
The following restrictions only apply to the Federal Intermediate Fund:
12. 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 Federal
Intermediate 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.
13. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
14. 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 bankruptcy or other extraordinary event occurs concerning a particular
security owned by a fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
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 each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each 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 each 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 (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds; and formerly, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 50 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (65)
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 or trustee,
as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); director or trustee of 25 of the investment
companies in the Franklin Templeton Group of Funds; formerly, chairman
(1995-1997) and trustee (1993-1997) of National Child Research Center,
assistant to the President of the United States and Secretary of the Cabinet
(1990-1993), general counsel to the United States Treasury Department
(1989-1990) and counselor to the Secretary and Assistant Secretary for Public
Affairs and Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (65)
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. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (57)
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 of the other subsidiaries of Franklin Resources, Inc. and of
54 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
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 28 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (70)
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), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, Hambrecht and
Quist Group, Director, H & Q Healthcare Investors and Lockhead Martin
Corporation and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President 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
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, 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 54 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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 54 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (35)
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 (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 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 Manager. Nonaffiliated members of the Board are
currently paid $1,300 per month plus $1,300 per meeting attended. As shown
above, 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
NAME THE TRUST*** GROUP OF FUNDS**** WHICH EACH SERVES*****
- --------------------------------------------------------------------------------
Frank H. Abbott, III $31,200 $165,937 28
Harris J. Ashton $29,900 $344,642 50
S. Joseph Fortunato $29,900 $361,562 52
David W. Garbellano* $14,300 $91,317 n/a
Edith E. Holiday $2,600 $72,875 25
Frank W.T. LaHaye $29,900 $141,433 28
Gordon S. Macklin $29,900 $337,292 50
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended February 28, 1998.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with
approximately 170 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 April 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the funds: approximately
88,312 shares of the Connecticut Fund - Class I, 101 shares of the High Yield
Fund - Class I, and 32,673 shares of the New Jersey 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 Manager provides investment
research and portfolio management services, including the selection of
securities for each fund to buy, hold or sell and the selection of brokers
through whom each fund's portfolio transactions are executed. The Manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The Manager's activities are subject to
the review and supervision of the Board to whom the Manager renders periodic
reports of each fund's investment activities. The Manager and its officers,
directors and employees are covered by fidelity insurance for the protection
of each fund.
The Manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The 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 Manager on behalf of each
fund. Similarly, with respect to each fund, the Manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that the 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 Manager is not obligated to refrain from investing in securities
held by the funds or other funds that it manages. Of course, any transactions
for the accounts of the Manager and other access persons will be made in
compliance with the funds' Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, each fund pays the 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.
The table below shows the management fees paid by each fund for the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996.
MANAGEMENT FEES PAID
--------------------------------------
1998 1997 1996
--------------------------------------
Arizona Fund $3,799,811 $ 3,627,685 $ 3,578,992
Colorado Fund 1,432,605 1,259,548 1,156,138
Connecticut Fund 1,126,660 1,012,114 941,489
Federal Intermediate Fund 628,115* 438,843* 335,817*
High Yield Fund 24,164,691 19,114,157 16,252,138
Indiana Fund 330,541 311,799 298,107
Michigan Fund. 0* 0* --
New Jersey Fund 3,074,915 2,827,318 2,755,151
Oregon Fund 2,119,137 1,964,313 1,887,234
Pennsylvania Fund 3,414,301 3,181,417 3,029,579
Puerto Rico Fund 1,137,320 1,083,818 1,054,668
*For the fiscal year ended February 28, 1998, and for the period July 1, 1996
through February 28, 1997, management fees, before any advance waiver,
totaled $44,302 and $12,802, respectively for the Michigan Fund. For the the
fiscal years ended February 28, 1998, February 28, 1997 and February 29,
1996, management fees, before any advance waiver, totaled $718,091, $586,462
and $491,681, respectively for the Federal Intermediate Fund. Under an
agreement by Advisers to limit its fees, the Federal Intermediate and
Michigan funds paid no management fees shown.
MANAGEMENT AGREEMENTS. The management agreements are in effect until March
31, 1999. They may continue in effect for successive annual periods if their
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 either 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 on 30 days' written notice to the Manager, or
by the Manager on 30 days' written notice to the fund, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the Manager, FT Services
provides certain administrative services and facilities for each 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 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 table below shows the administration fees paid to FT Services for the
fiscal years ended February 28, 1998 and 1997. The fees are paid by the
Manager. They are not a separate expense of the fund.
ADMINISTRATION FEES PAID
------------------------
1998 1997*
-----------------------------------
Arizona Fund $1,060,456 $ 430,330
Colorado Fund 383,050 144,807
Connecticut Fund 298,352 114,062
Federal Intermediate Fund 176,069 62,460
High Yield Fund 4,519,848 1,626,344
Indiana Fund 79,053 31,765
Michigan Fund 10,328 2,069
New Jersey Fund 872,308 339,343
Oregon Fund 587,736 229,705
Pennsylvania Fund 971,653 384,008
Puerto Rico Fund 301,686 120,593
*For the period October 1, 1996 through February 28, 1997
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
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
each 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 funds' independent auditors. During the fiscal year
ended February 28, 1998, 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, 1998.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the funds are principal transactions at net prices,
the funds incur little or no brokerage costs. The funds deal directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on their 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 funds do not buy bonds in underwritings where they are given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The funds seek 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 Manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the Manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the Manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' 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 funds' portfolio transactions.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the 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 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the fund.
During the fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996, the funds paid no brokerage commissions.
As of February 28, 1998, the funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their 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 funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of the funds
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 a 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 funds'
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 funds 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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
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 the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds 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
amount of your total purchases, less redemptions, is 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 each 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
goals 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. 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. Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the 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 funds do 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 funds 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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are not responsible for tracking down uncashed
checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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 a 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 funds on behalf of numerous
beneficial owners for recordkeeping operations performed with respect to such
owners. For each beneficial owner in the omnibus account, a 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 close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the funds are informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. 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 each 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
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 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 close of the NYSE that will not be reflected in the
computation of the 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 funds may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of
the Code, each fund has qualified and continues to qualify to pay
"exempt-interest dividends" to shareholders. These dividends are derived
from interest income exempt from regular federal income tax, and are not
subject to regular federal income tax when they are distributed. In
addition, to the extent that exempt-interest dividends are derived from
interest on obligations of a state or its political subdivisions, or from
interest on qualifying U.S. territorial obligations (including qualifying
obligations of Puerto Rico, the U.S. Virgin Islands or Guam), they will also
be exempt from that state's personal income taxes. A state generally does
not grant tax-free treatment to interest on state and municipal securities of
other states.
At the end of each calendar year, each fund in which you are a shareholder
will provide you with the percentage of any dividends paid that may qualify
for tax-free treatment on your personal income tax return. You should
consult with your personal tax advisor to determine the application of your
state and local laws to these distributions. Corporate shareholders should
consult with their corporate tax advisors about whether any of their
distributions may be exempt from corporate income or franchise taxes. For
more information, please see "Appendices - State Tax Treatment."
A fund may earn taxable income on any temporary investments, on the discount
from stripped obligations or their coupons, on income from securities loans
or other taxable transactions, on the excess of short-term capital gains over
long-term capital losses earned by the fund ("net short-term capital gain"),
or on ordinary income derived from the sale of market discount bonds. Any
distributions by a fund from such income will be taxable to you as ordinary
income, whether you take them in cash or additional shares.
From time to time, a fund may buy a tax-exempt bond in the secondary market
for a price that is less than the principal amount of the bond. This
discount is called market discount if it exceeds a de minimis amount of
discount under the Code. For market discount bonds purchased after April 30,
1993, a portion of the gain on sale or disposition (not to exceed the accrued
portion of market discount at the time of the sale) is treated as ordinary
income rather than capital gain. Any distribution by a fund of market
discount income will be taxable as ordinary income to you. A fund may elect
in any fiscal year not to distribute to you its taxable ordinary income and
to pay a federal income or excise tax on this income at the fund level. In
any case, the amount of market discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses
in connection with sales or other dispositions 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 gains realized by a fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by a fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a fund after July
28, 1997 that were held for more than one year but not more than 18 months,
and securities sold by a fund before May 7, 1997 that were held for more than
one year. These gains will be taxable to individual investors at a maximum
rate of 28%.
"20% RATE GAINS": gains resulting from securities sold by a fund after July
28, 1997 that were held for more than 18 months, and under a transitional
rule, securities sold by a fund between May 7 and July 28, 1997 (inclusive)
that were held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than five years that are sold after
December 31, 2000. For individuals who are subject to tax at higher rates,
qualified 5-year gains are net gains on securities that are purchased after
December 31, 2000 and are held for more than five years. Taxpayers subject
to tax at the higher rates may also make an election for shares held on
January 1, 2001 to recognize gain on their shares in order to qualify such
shares as qualified 5-year property.
Each fund in which you are a shareholder will advise you at the end of each
calendar year of the amount of its capital gain distributions paid during the
calendar year that qualify for these maximum federal tax rates. Additional
information on reporting these distributions on your personal income tax
returns is available in Franklin Templeton's Tax Information Handbook. This
handbook has been revised to include 1997 Act tax law changes. Please call
Fund Information to request a copy. Questions about your personal tax
reporting should be addressed to your personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if
any, which are declared in October, November or December to shareholders of
record in such month, and paid to you in January of the following year, will
be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. A fund will report this income
to you on your Form 1099-DIV for the year in which these distributions were
declared. You will receive a Form 1099-DIV only for calendar years in which
a fund has made a distribution to you of taxable ordinary income or capital
gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you
are a shareholder will inform you of the amount and character of your
distributions at the time they are paid, and will shortly after the close of
each calendar year advise you of the tax status for federal income tax
purposes of such distributions, including the portion of the distributions
that on average comprise taxable income or interest income that is a tax
preference item under the alternative minimum tax. If you have not held fund
shares for a full year, you may have designated as taxable, tax-exempt or as
a tax preference a percentage of income that is not equal to the actual
amount of such income earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has
elected to be treated as a regulated investment company under Subchapter M of
the Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. The Board reserves the right
not to maintain the qualification of a fund as a regulated investment company
if it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, each
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the fund's
total assets, and, with respect to 50% of a fund's total assets, no
investment (other than cash and cash items, U.S. government securities
and securities of other regulated investment companies) can exceed 5%
of the fund's total assets;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year
and 98% of its capital gain net income earned during the twelve month period
ending October 31 (in addition to undistributed amounts from the prior year)
to you by December 31 of each year in order to avoid federal excise taxes.
Each fund intends to declare and pay sufficient dividends in December (or in
January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
Any loss incurred on the redemption or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your shares in a fund and any remaining
loss will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by a fund on those shares. The
holding periods and categories of capital gain that apply under the 1997 Act
are described above in the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your
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 your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in a fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because each fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the funds for the most recent
fiscal year qualified for such deduction, and it is anticipated that none of
the current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans)
issued after August 7, 1986, while still exempt from regular federal income
tax, is a preference item for taxpayers in determining their alternative
minimum tax under the Code and under the income tax provisions of several
states. Private activity bond interest could subject you to or increase your
liability under federal and state alternative minimum taxes, depending on
your individual or corporate tax position.
Consistent with each fund's investment goals, each fund may acquire such
private activity bonds if, in the Manager's opinion, such bonds represent the
most attractive investment opportunity then available to the fund. Persons
who are defined in the Code as "substantial users" (or persons related to
such users) of facilities financed by private activity bonds should consult
with their tax advisors before buying shares in the fund.
The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as
on activities financed by certain industrial development or private activity
bonds. Some of these bonds, including bonds for sports arenas, parking
facilities, and pollution control facilities, are generally not tax-exempt
because they generally do not pay tax-exempt interest.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To
the extent a fund invests in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by a fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, a fund may elect to accrue market discount
on a current basis, in which case the fund will be required to distribute any
such accrued discount. If a fund does not elect to accrue market discount
into income currently, gain recognized on sale will be recharacterized as
ordinary income instead of capital gain to the extent of any accumulated
market discount on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, a fund may
be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each 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 each 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, 1998, February 28, 1997 and February 29, 1996.
AMOUNT AMOUNT RECEIVED
TOTAL RETAINED IN CONNECTION
COMMISSIONS BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS OR REPURCHASES
1998
Arizona Fund $ 2,894,958 $ 189,181 $5,073
Colorado Fund 1,099,794 68,871 2,658
Connecticut Fund 1,038,873 64,019 2,066
Federal Intermediate Fund 346,839 47,207 0
High Yield Fund 27,355,789 1,661,281 114,622
Indiana Fund 188,219 12,470 0
Michigan Fund 112,690 7,243 0
New Jersey Fund 2,514,214 152,637 10,997
Oregon Fund 1,645,005 106,236 4,656
Pennsylvania Fund 3,017,041 187,577 5,534
Puerto Rico Fund 748,531 49,128 1,587
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
Federal Intermediate Fund 301,298 40,297 0
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 $ 2,315,362 $ 152,141 $ 812
Colorado Fund 932,916 61,815 436
Connecticut Fund 727,487 45,602 298
Federal Intermediate Fund 235,212 33,015 3,334
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
*For the period July 1, 1996 to February 28, 1997.
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 funds for acting as underwriter.
THE RULE 12B-1 PLANS
Each fund and class have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
MICHIGAN PLAN. Under its 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 PLANS. Under the Class I plan of each fund except the Michigan
Fund, each 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 of each fund except the Federal Intermediate
and Michigan Funds, the Board has determined that the annual fees payable
under each 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 for each fund except the Federal
Intermediate and Michigan Funds 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 plans, each 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 plans.
The Class I plans do not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, each 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 plans, each 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 Manager or Distributors or other parties on behalf of the fund, the
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 Manager or by
vote of a majority of the outstanding shares of the class. The Federal
Intermediate plan 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, 1998, 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
EXPENSES BY FUND EXPENSES BY FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona Fund $ 715,371 $ 658,644 $ 122,986 $ 54,771
Colorado Fund 273,472 218,858 84,497 49,748
Connecticut Fund 215,957 175,352 71,800 37,477
Federal Intermediate Fund 186,044 114,604 - -
High Yield Fund 5,582,178 3,995,368 3,232,956 1,824,447
Indiana Fund 80,271 45,242 - -
Michigan Fund 26,130 6,487 - -
New Jersey Fund 603,145 522,659 234,553 127,453
Oregon Fund 393,877 346,535 85,878 66,864
Pennsylvania Fund 662,808 590,152 199,460 111,140
Puerto Rico Fund 191,483 168,508 31,111 15,262
</TABLE>
HOW DO THE FUNDS 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 a 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 funds
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 funds 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 the periods indicated below
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 period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for each class for the indicated periods
ended February 28, 1998, 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 - Class I 09/01/87 3.62% 5.14% 7.29% 7.43%
Arizona Fund - Class II 05/01/95 5.64 - - 6.71
Colorado Fund - Class I 09/01/87 4.28 5.46 7.68 7.76
Colorado Fund - Class II 05/01/95 6.31 - - 7.29
Connecticut Fund - Class I 10/03/88 4.06 5.01 - 6.80
Connecticut Fund - Class II 05/01/95 6.03 - - 6.84
Federal Intermediate Fund 09/23/92 5.62 6.08 - 6.78
High Yield Fund - Class I 03/18/86 5.92 7.00 8.55 8.37
High Yield Fund - Class II 05/01/95 8.09 - - 8.68
Indiana Fund 09/01/87 3.94 5.22 7.60 7.79
Michigan Fund 07/01/96 6.90 - - 7.83
New Jersey Fund - Class I 05/12/88 3.73 4.96 - 7.61
New Jersey Fund - Class II 05/01/95 5.77 - - 6.81
Oregon Fund - Class I 09/01/87 3.64 4.90 7.11 7.09
Oregon Fund - Class II 05/01/95 5.57 - - 6.71
Pennsylvania Fund - Class I 12/01/86 4.29 5.45 7.58 6.91
Pennsylvania Fund - Class II 05/01/95 6.23 - - 7.02
Puerto Rico Fund - Class I 04/03/85 4.17 5.31 7.28 7.67
Puerto Rico Fund - Class II 05/01/95 5.97 - - 6.88
</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 each period at the end of each period
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, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for each class
for the indicated periods ended February 28, 1998, 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 - Class I 09/01/87 3.62% 28.46% 102.16% 112.22%
Arizona Fund - Class II 05/01/95 5.64 - - 20.18
Colorado Fund - Class I 09/01/87 4.28 30.44 109.61 119.14
Colorado Fund - Class II 05/01/95 6.31 - - 22.04
Connecticut Fund - Class I 10/03/88 4.06 27.69 - 85.61
Connecticut Fund - Class II 05/01/95 6.03 - - 20.60
Federal Intermediate Fund 09/23/92 5.62 34.31 - 42.79
High Yield Fund - Class I 03/18/86 5.92 40.24 127.12 161.39
High Yield Fund - Class II 05/01/95 8.09 - - 26.57
Indiana Fund 09/01/87 3.94 28.99 108.02 119.77
Michigan Fund 07/01/96 6.90 - - 13.35
New Jersey Fund - Class I 05/12/88 3.73 27.41 - 105.23
New Jersey Fund - Class II 05/01/95 5.77 - - 20.50
Oregon Fund - Class I 09/01/87 3.64 26.99 98.68 105.30
Oregon Fund - Class II 05/01/95 5.57 - - 20.19
Pennsylvania Fund - Class I 12/01/86 4.29 30.37 107.60 111.91
Pennsylvania Fund - Class II 05/01/95 6.23 - - 21.18
Puerto Rico Fund - Class I 04/03/85 4.17 29.50 101.97 159.49
Puerto Rico Fund - Class II 05/01/95 5.97 - - 20.72
</TABLE>
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by a 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, 1998, was as follows:
YIELD
---------------------------
CLASS I CLASS II
- ----------------------------------------------------------
Arizona Fund 4.02% 3.61%
Colorado Fund 4.10 3.69
Connecticut Fund 4.11 3.72
Federal Intermediate Fund 3.88 -
High Yield Fund 4.69 4.29
Indiana Fund 4.17 -
Michigan Fund 4.76 -
New Jersey Fund 4.17 3.75
Oregon Fund 4.02 3.58
Pennsylvania Fund 4.21 3.79
Puerto Rico Fund 3.92 3.49
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD. The fund may also quote a taxable-equivalent yield
for each class that shows the before-tax yield that would have to be earned
from a taxable investment to equal the yield for the class.
Taxable-equivalent yield is computed by dividing the portion of the class'
yield that is tax-exempt by one minus the highest applicable 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, 1998, was as follows:
TAXABLE-EQUIVALENT YIELD
CLASS I CLASS II
- --------------------------------------------------------------------------------
Arizona Fund 7.02% 6.30%
Colorado Fund 7.15 6.43
Connecticut Fund 7.13 6.45
Federal Intermediate Fund 6.42 -
High Yield Fund 7.76 7.10
Indiana Fund 7.22 -
Michigan Fund 8.24 -
New Jersey Fund 7.37 6.63
Oregon Fund 7.31 6.51
Pennsylvania Fund 7.17 6.46
Puerto Rico Fund 6.49 5.78
As of February 28, 1998, 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 Fund 42.7%
Colorado Fund 42.6
Connecticut Fund 42.3
Federal Intermediate Fund 39.6
High Yield Fund 39.6
Indiana Fund 42.3
Michigan Fund 42.3
New Jersey Fund 43.4
Oregon Fund 45.0
Pennsylvania Fund 41.3
Puerto Rico Fund 39.6
*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 funds will be updated
to reflect these changes. The funds expect updates may be necessary as tax
rates are changed by federal and state governments. The advantage of tax-free
investments, like the funds, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales
material for the funds.
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. 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, 1998, was as follows:
CURRENT
DISTRIBUTION RATE
CLASS I CLASS II
Arizona Fund 5.02% 4.58%
Colorado Fund 4.93 4.50
Connecticut Fund 5.01 4.61
Federal Intermediate Fund 4.59 -
High Yield Fund 5.51 5.10
Indiana Fund 5.04 -
Michigan Fund 5.00 -
New Jersey Fund 5.01 4.58
Oregon Fund 5.04 4.62
Pennsylvania Fund 5.11 4.68
Puerto Rico Fund 4.94 4.52
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,
1998, was as follows:
TAXABLE-EQUIVALENT
DISTRIBUTION RATE
CLASS I CLASS II
Arizona Fund 8.76% 8.00%
Colorado Fund 8.59 7.84
Connecticut Fund 8.69 7.99
Federal Intermediate Fund 7.60 -
High Yield Fund 9.12 8.44
Indiana Fund 8.73 -
Michigan Fund 8.66 -
New Jersey Fund 8.86 8.10
Oregon Fund 9.17 8.41
Pennsylvania Fund 8.70 7.97
Puerto Rico Fund 8.18 7.48
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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 funds may include in their advertising or sales material information
relating to investment goals 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 funds may satisfy your
investment goal, advertisements and other materials about the funds 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 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 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 CS 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. 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 funds 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 fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of a fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the funds' portfolios, 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund cannot guarantee that these goals will be met.
Each 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 50 years
and now services more than 3 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, a pioneer in
international investing. The Mutual Series team, 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 $232 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
120 U.S. based open-end investment companies to the public. Each 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 $48 billion in municipal bond assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
March 31, 1997.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1998, taxes could
cost almost $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 1998). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of such securities, however, may fluctuate.
This fluctuation will have a direct impact on the Net Asset Value of an
investment in a fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the funds 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.
According to Strategic Insight, dated February 28, 1998, the Arizona and
Oregon funds were the largest municipal bond funds in their respective states.
As of April 2, 1998, the principal shareholders of the funds, beneficial or
of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
MICHIGAN FUND - CLASS I
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Floor
San Mateo, CA 94404-2467 237,283.538 26.84%
David W. Elliott TTEE
David W. Elliott Rev Tr
1291 Sunniwood Pl.
Rochester, MI 48306-2474 49,067.713 5.55%
Lawrence A. Henze II
8406 Linda
Warren, MI 48093-4920 45,372.051 5.13%
PUERTO RICO FUND - CLASS II
Advest Bank TTEE
Sybil Hastings TR
U.W. Patricia Doorly
Dtd 01.02.90
Attn. Trust Division
90 State House Square
Hartford, CT 06103 18,936.712 5.89%
Pierre Morel
2939 Van Ness St. NW
Washington, DC 20008-4604 23,433.420 7.29%
Michael Larkin
125 Hemler Crk.
Kalispell, MT 59901 16,791.727 5.22%
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 funds' Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of a fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of a fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that a 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 a 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 a 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, each 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 and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) 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, 1998,
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 Federal Intermediate, 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 Federal Intermediate, 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTMENT ADVISORY - Franklin Investment Advisory Services, Inc., the
Connecticut Fund's investment manager
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGER - Franklin Advisers, Inc. or Franklin Investment Advisory Services,
Inc., as applicable.
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 for all funds
except the Federal Intermediate Fund. The maximum front-end sales charge for
the Federal Intermediate Fund is 2.25%.
PROSPECTUS - The prospectus for the funds dated July 1, 1998, 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 that 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
that suggest a susceptibility to impairment sometime in the future.
BAA: Municipal bonds rated Baa are considered medium-grade obligations. 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. These 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 and 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 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 each 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 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 TAX-FREE TRUST
FILE NOS. 02-94222
& 811-4149
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, 1998 as
filed electronically with the Securities and Exchange Commission on Form
Type N-30D on April 24, 1998.
(i) Financial Highlights
(ii) Statement of Investments - February 28, 1998
(iii)Statements of Assets and Liabilities - February 28, 1998
(iv) Statements of Operations - for the year ended February 28, 1998
(v) Statements of Changes in Net Assets - for the years ended February 28,
1998 and 1997
(vi) Notes to Financial Statements
(vii)Independent Auditors' Report
b) Exhibits:
The following exhibits are incorporated by reference as noted, except
Exhibits 8(iii), 8(iv), 9(iii), 9(iv), 9(v), 10(i), 11(i), 17(i), 17(ii),
18(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) Certificate of Amendment of 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) Amendment 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) Amendment to By-Laws dated January 18, 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 5
percent of any class of equity securities of the Registrant;
Not Applicable
(4) copies of all instruments defining the rights of the holders of the
securities being registered including, where applicable, the relevant
portion of the articles of incorporation or by-laws of the Registrant;
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
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: June 27, 1997
(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 Registrant 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
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
remuneration;
(i) Master Custody 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
(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
(iv) Amendment dated October 15, 1997 to Exhibit A in the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
(9) copies of all other material contracts not made in the ordinary course
of business which are to be performed in whole or in part at or after
the date of filing the Registration Statement;
(i) Agreement between Registrant and Financial Guaranty
Insurance Company dated March 8, 1985
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Agreement between Registrant and Financial
Guaranty Insurance Company dated November 24, 1992
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
(iii) Mutual Fund Agreement between Registrant and Financial
Guaranty Insurance Company dated April 30, 1993
(iv) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated March 11, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services Inc.
(v) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated July 1, 1997 between
Franklin Investment Advisory Services, Inc. and Franklin
Templeton Services, Inc.
(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 17, 1998
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this Registration
Statement and required by Section 7 of the 1933 Act:
(i) Consent of Independent Auditors dated April 27, 1998
(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, 1995
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
in structions 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
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: June 27, 1997
(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 - Class II
Franklin Arizona Tax-Free Income Fund - Class II
Franklin Colorado Tax-Free Income Fund - Class II
Franklin Connecticut Tax-Free Income Fund - Class II
Franklin Florida Tax-Free Income Fund - Class II
Franklin Georgia Tax-Free Income Fund - Class II
Franklin High Yield Tax-Free Income Fund - Class II
Franklin Insured Tax-Free Income Fund - Class II
Franklin Louisiana Tax-Free Income Fund - Class II
Franklin Maryland Tax-Free Income Fund- Class II
Franklin Massachusetts Insured Tax-Free Income Fund - Class II
Franklin Michigan Insured Tax-Free Income Fund - Class II
Franklin Minnesota Insured Tax-Free Income Fund - Class II
Franklin Missouri Tax-Free Income Fund - Class II
Franklin New Jersey Tax-Free Income Fund - Class II
Franklin North Carolina Tax-Free Income Fund - Class II
Franklin Ohio Insured Tax-Free Income Fund - Class II
Franklin Oregon Tax-Free Income Fund - Class II
Franklin Pennsylvania Tax-Free Income Fund - Class II
Franklin Puerto Rico Tax-Free Income Fund - Class II
Franklin Texas Tax-Free Income Fund - Class II
Franklin Virginia Tax-Free Income Fund - Class II
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 March 19, 1998
(ii) Certificate of Secretary dated March 19, 1998
(18) copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan dated October 19, 1995
(27) Financial Data Schedules
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 - Class I
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-Free
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 February 28, 1998 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 3,672 244
Arizona Insured Fund 885 N/A
Arizona Fund 13,391 438
Colorado Fund 5,665 347
Connecticut Fund 4,537 258
Federal Intermediate Fund 2,843 N/A
Florida Insured Fund 1,582 N/A
Florida Fund 23,843 1,183
Georgia Fund 3,517 310
High Yield Fund 106,949 11,642
Indiana Fund 1,718 N/A
Insured Fund 32,246 1,070
Kentucky Fund 1,120 N/A
Louisiana Fund 2,495 129
Maryland Fund 5,204 378
Massachusetts Insured Fund 6,627 364
Michigan Insured Fund 26,929 1,092
Michigan Fund 274 N/A
Minnesota Insured Fund 11,774 340
Missouri Fund 7,610 346
New Jersey Fund 15,245 946
North Carolina Fund 6,232 608
Ohio Insured Fund 17,046 792
Oregon Fund 8,942 524
Pennsylvania Fund 18,194 939
Puerto Rico Fund 6,090 157
Texas Fund 2,680 98
Virginia Fund 7,145 407
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 of 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 managers 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 Floating Rate Trust
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
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
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
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
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
(a) 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.
(b) 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 has duly caused this Amendment to its
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
29th day of April, 1998.
FRANKLIN TAX-FREE TRUST
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
RUPERT H. JOHNSON, JR.* Trustee and Principal
Rupert H. Johnson, Jr. Executive Officer
Dated: April 29, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: April 29, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: April 29, 1998
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: April 29, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: April 29, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: April 29, 1998
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: April 29, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: April 29, 1998
FRANK W. T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: April 29, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: April 29, 1998
*By /s/ Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN TAX-FREE TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Restated Agreement and Declaration of *
Trust dated October 26, 1984
EX-99.B1(ii) Certificate of Amendment of Agreement *
and Declaration of Trust dated July 16,
1991
EX-99.B1(iii) Certificate of Amendment of Agreement *
and Declaration of Trust dated April 21,
1992
EX-99.B1(iv) Certificate of Amendment of Agreement *
and Declaration of Trust dated December
14, 1993
EX-99.B1(v) Certificate of Amendment of Agreement *
and Declaration of Trust dated March 21,
1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Certificate of Amendment of By-Laws *
dated December 8,1987
EX-99.B2(iii) Amendment to By-Laws dated April 21, 1992 *
EX.99.B2(iv) Certificate of Amendment of By-Laws *
dated December 14, 1993
EX-99.B2(v) Certificate of Secretary dated February *
28, 1994
EX-99.B5(i) Management Agreement between Registrant *
and Franklin Investment Advisory
Services, 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 Registrant and Franklin
Advisers, Inc. dated August 1, 1995
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.
dated March 29, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and securities dealers
EX-99.B8(i) Master Custody 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.B8(iii) Amendment dated May 7, 1997 to Master Attached
Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
EX-99.B8(iv) Amendment dated October 15, 1997 to Attached
Exhibit A in the Master Custody
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 dated November 24, 1992
EX-99.B9(iii) Mutual Fund Agreement between Registrant Attached
and Financial Guaranty Insurance Company
dated April 30, 1993
EX-99.B9(iv) Subcontract for Fund Administrative Attached
Services dated October 1, 1996 and
Amendment thereto dated March 11, 1998
between Franklin Advisers, Inc. and
Franklin Templeton Services Inc.
EX-99.B9(v) Subcontract for Fund Administrative Attached
Services dated October 1, 1996 and
Amendment thereto dated July 1, 1997
between Franklin Investment Advisory
Services, Inc. and Franklin Templeton
Services, Inc.
EX-99.B10(i) Opinion and Consent of Counsel dated Attached
April 17, 1998
EX-99.B11(i) Consent of Independent Auditors dated Attached
April 27, 1998
EX-99.B13(i) Letter of Understanding dated *
September 21, 1992
EX-99.B13(ii) Letter of Understanding dated April 12, *
1994
EX-99.B15(i) Class I Shares Distribution Plan *
pursuant to Rule 12b-1 on behalf of
Franklin Michigan 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 1, 1994
EX-99.B15(iii) Class II Shares Distribution Plan *
pursuant to Rule 12b-1 dated March 30,
1995
EX-99.B16(i) Schedule for computation of performance *
quotation
EX-99.B17(i) Power of Attorney dated March 19, 1998 Attached
EX-99.B17(ii) Certificate of Secretary dated March 19, Attached
1998
EX-99.B18(i) Multiple Class Plan dated October 19, Attached
1995
EX-27.B-1 Financial Data Schedule for Franklin Attached
Insured Tax-Free
Income Fund Class I
EX-27.B-2 Financial Data Schedule for Franklin Attached
Insured Tax-Free
Income Fund Class II
EX-27.B-3 Financial Data Schedule for Attached
Massachusetts Insured Tax-Free Income
Fund Class I
EX-27.B-4 Financial Data Schedule for Attached
Massachusetts Insured Tax-Free Income
Fund Class II
EX-27.B-5 Financial Data Schedule for Franklin Attached
Michigan Insured Tax-Free Income Fund
Class I
EX-27.B-6 Financial Data Schedule for Franklin Attached
Michigan Insured Tax-Free Income
Fund Class II
EX-27.B-7 Financial Data Schedule for Franklin Attached
Minnesota Insured Tax-Free Income
Fund Class I
EX-27.B-8 Financial Data Schedule for Franklin Attached
Minnesota Insured Tax-Free Income
Fund Class II
EX-27.B-9 Financial Data Schedule for Franklin Attached
Ohio Insured Tax-Free Income Fund
Class I
EX-27.B-10 Financial Data Schedule for Franklin Attached
Ohio Insured Tax-Free Income Fund
Class II
EX-27.B-11 Financial Data Schedule for Franklin Attached
Puerto Rico Tax-Free Income Fund
Class I
EX-27.B-12 Financial Data Schedule for Franklin Attached
Puerto Rico Tax-Free Income Fund
Class II
EX-27.B-13 Financial Data Schedule for Franklin Attached
High-Yield Income Fund Class I
EX-27.B-14 Financial Data Schedule for Franklin Attached
High-Yield Tax-Free Income Fund
Class II
EX-27.B-15 Financial Data Schedule for Franklin Attached
Pennsylvania Tax-Free Income Fund
Class I
EX-27.B-16 Financial Data Schedule for Franklin Attached
Pennsylvania Tax-Free Income Fund
Class II
EX-27.B-17 Financial Data Schedule for Franklin Attached
Colorado Tax-Free Income Fund Class I
EX-27.B-18 Financial Data Schedule for Franklin Attached
Colorado Tax-Free Income Fund Class II
EX-27.B-19 Financial Data Schedule for Franklin Attached
Michigan Tax-Free Income Fund
EX-27.B-20 Financial Data Schedule for Franklin Attached
Georgia Tax-Free Income Fund Class I
EX-27.B-21 Financial Data Schedule for Franklin Attached
Georgia Tax-Free Income Fund Class II
EX-27.B-22 Financial Data Schedule for Franklin Attached
Missouri Tax-Free Income Fund Class I
EX-27.B-23 Financial Data Schedule for Franklin Attached
Missouri Tax-Free Income Fund Class II
EX-27.B-24 Financial Data Schedule for Franklin Attached
Oregon Tax-Free Income Fund Class I
EX-27.B-25 Financial Data Schedule for Franklin Attached
Oregon Tax-Free Income Fund Class II
EX-27.B-26 Financial Data Schedule for Franklin Attached
Texas Tax-Free Income Fund Class I
EX-27.B-27 Financial Data Schedule for Franklin Attached
Texas Tax-Free Income Fund Class II
EX-27.B-28 Financial Data Schedule for Franklin Attached
Virginia Tax-Free Income Fund Class I
EX-27.B-29 Financial Data Schedule for Franklin Attached
Virginia Tax-Free Income Fund Class II
EX-27.B-30 Financial Data Schedule for Franklin Attached
Alabama Tax-Free Income Fund Class I
EX-27.B-31 Financial Data Schedule for Franklin Attached
Alabama Tax-Free Income Fund Class II
EX-27.B-32 Financial Data Schedule for Franklin Attached
Florida Tax-Free Income Fund Class I
EX-27.B-33 Financial Data Schedule for Franklin Attached
Florida Tax-Free Income Fund Class II
EX-27.B-34 Financial Data Schedule for Franklin Attached
Indiana Tax-Free Income Fund Class I
EX-27.B-35 Financial Data Schedule for Franklin Attached
Louisiana Tax-Free Income Fund Class I
EX-27.B-36 Financial Data Schedule for Franklin Attached
Louisiana Tax-Free Income Fund Class II
EX-27.B-37 Financial Data Schedule for Franklin Attached
North Carolina Tax-Free Income Fund
Class I
EX-27.B-38 Financial Data Schedule for Franklin Attached
North Carolina Tax-Free Income Fund
Class II
EX-27.B-39 Financial Data Schedule for Franklin Attached
Arizona Tax-Free Income Fund Class I
EX-27.B-40 Financial Data Schedule for Franklin Attached
Arizona Tax-Free Income Fund Class II
EX-27.B-41 Financial Data Schedule for Franklin New Attached
Jersey Tax-Free Income Fund Class I
EX-27.B-42 Financial Data Schedule for Franklin New Attached
Jersey Tax-Free Income Fund Class II
EX-27.B-43 Financial Data Schedule for Franklin Attached
Connecticut Tax-Free Income Fund
Class I
EX-27.B-44 Financial Data Schedule for Franklin Attached
Connecticut Tax-Free Income Fund
Class II
EX-27.B-45 Financial Data Schedule for Franklin Attached
Maryland Tax-Free Income Fund Class I
EX-27.B-46 Financial Data Schedule for Franklin Attached
Maryland Tax-Free Income Fund Class II
EX-27.B-47 Financial Data Schedule for Franklin Attached
Kentucky Tax-Free Income Fund
EX-27.B-48 Financial Data Schedule for Franklin Attached
Federal Intermediate-Term Tax-Free
Income Fund
EX-27.B-49 Financial Data Schedule for Franklin Attached
Arizona Insured Tax-Fee Income Fund
EX-27.B-50 Financial Data Schedule for Franklin Attached
Florida Insured Tax-Fee Income Fund
*Incorporated by Reference
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon [2] business days prior notice from a Fund that it will
invest in any security issued by a Russian issuer ("Russian Security"), the
Custodian shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular share confirmations
on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow the
independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's responsibilities
with regard to corporate actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable to the Russian share
registration -system and (iii) the procedures for making a claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery of
Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Name: Stephen E. Grunston
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /S/ DEBORAH R. GATZEK
Name: Deborah R. Gatzek
Title: Vice President
By: /S/ KAREN L. SKIDMORE
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Stephen E. Grunston
Title: Vice President
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master
Custody Agreement dated as of February 16, 1996.
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Delaware Business Trust
Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities
Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------------------------------
INTERVAL FUND:
Franklin Floating Rate Trust Delaware Business Trust
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MUTUAL FUND AGREEMENT
This Agreement is made this 30th day of April, 1993 by and between FRANKLIN
TAX-FREE TRUST, a Massachusetts business trust, with principal offices at 777
Mariners Island Boulevard, San Mateo, California 94404 ("Franklin") and
FINANCIAL GUARANTY INSURANCE COMPANY, a New York stock insurance company, with
principal offices at 115 Broadway, New York, New York 10006 ("Financial
Guaranty"), with reference to the following facts:
A. Franklin is an open-end investment company (mutual fund), organized as a
Massachusetts business trust. Franklin currently consists of twenty-seven
separate series, two of which are: Franklin Arizona Insured Tax-Free Income
Fund (the "Arizona Fund") and Franklin Florida Insured Tax-Free Income Fund
(the "Florida Fund") (collectively, the "Insured Funds"). Each of the
Insured Funds issues a separate series of Franklin's shares and will
maintain a totally separate investment portfolio. The Insured Funds are
currently the only funds intended to be insured under this Agreement. Other
insured funds may be organized by Franklin from time to time and may be
covered by this Agreement as herein provided.
B. The Arizona Fund will invest primarily in securities of the State of
Arizona and its political subdivisions, agencies, and instrumentalities,
the interest on which is exempt from federal and Arizona personal income
taxes. The Florida Fund will invest primarily in securities of the State of
Florida and its political subdivisions, agencies, and instrumentalities,
the interest on which is exempt from federal and Florida personal income
taxes. Franklin desires to have certain of the Insured Fund's investments
in municipal securities be covered by portfolio insurance guaranteeing
their scheduled payment of interest and of principal while held by the
Insured Fund.
C. Financial Guaranty is in the business of providing insurance and financial
guaranties for a variety of investment instruments. Financial Guaranty
desires to provide Franklin the portfolio insurance described in the
preceding paragraph (B).
In consideration of the mutual covenants and conditions set forth below,
Franklin and Financial Guaranty agree as follows:
1. AGREEMENT TO INSURE.
1.1 Financial Guaranty agrees to insure the municipal securities purchased
in accordance with the terms of this Agreement from time to time by
Franklin for the Insured Fund, which municipal securities Financial
Guaranty has approved in advance of such purchase as eligible for
insurance.
1.2 Notwithstanding Section 1.1, Franklin may, but shall not be required
to purchase insurance from Financial Guaranty for municipal securities
covered by insurance obtained by the issuer or by any seller,
including a dealer, and applicable to the securities purchased by
Franklin, regardless of the insurance company providing such
insurance.
1.3 Franklin may, but shall not be required to purchase insurance from
Financial Guaranty on any municipal securities where the payment of
interest and principal is guaranteed by the United States of America
or an agency or instrumentality of the United States of America or
where an escrow or trust account has been established which contains
sufficient direct, non-callable obligations of the United States of
America or securities backed by the full faith and credit of the
United States of America in order to ensure the timely payment of
principal and interest on such municipal securities,, or on any
short-term instruments, such as Project Notes or tax exempt commercial
paper, which have the highest rating issued by Standard & Poor's.
2. ISSUANCE OF MASTER POLICIES.
2.1 Financial Guaranty agrees to issue a master insurance policy (the
"Master Policy") for the Insured Fund, and future insured funds which
may be organized by Franklin, on the date Franklin informs Financial
Guaranty it desires to have Financial Guaranty issue a Master Policy
for a given insured fund. (The form of the Master Policy is attached
hereto as Exhibit 1.) A schedule will be issued by Financial Guaranty
and attached to and made a part of each Master Policy which lists all
bonds insured in the given Insured Fund ("Schedule All). Each Schedule
A will list the following information for each insured bond in a given
Insured Fund: item number, par or face value, full name of issuer,
full name of bond, interest rate, date of bond, stated maturity date
of bond, CUSIP number, secondary market premium rate, annual premium
rate, annual premium amount, date bond first insured under policy, and
date bond sold (including, for all purposes of this Agreement,
municipal securities not delivered or paid prior to maturity). As
bonds are added to and/or sold from an insured fund's portfolio,
Financial Guaranty agrees to issue updated addendums to Schedule A
reflecting such deletions and/or additions. Financial Guaranty agrees
to deliver to Franklin updated Schedule A's on a monthly basis for
each insured fund. In addition, Financial Guaranty agrees to provide
to Franklin for each insured fund on a monthly basis a summary which
contains the same information specified above for inclusion in
Schedule A but on a cumulative basis for all insured bonds which have
been sold by an insured fund.
2.2 Financial Guaranty's obligation to insure any particular bond which it
has agreed to insure is subject only to Franklin's becoming the
bondholder (within the meaning of the Master Policies) (i) on or
before the 100th day following the date on which the Fund purchases
such bond (the "Purchase Date") or (ii) on or before the 150th day
following the Purchase Date in the case of "when, as and if issued"
bonds which the issuer thereof has failed timely to deliver in
definitive form to the original purchasers thereof. So long as
Franklin becomes the bondholder on or before the 100th or 150th day
following the Purchase Date, as the case may be, such municipal
security shall be insured as of the Purchase Date.
3. PREMIUM PAYMENT.
3.1 Financial Guaranty agrees to provide Franklin on the fifth business
day of each month with a premium payment statement for each Insured
Fund containing an accounting of the premium due for that month,
including adjustments for (i) any premium refund due Franklin because
of the sale of bond(s) by an Insured Fund during the previous month
(including bonds for which Secondary Market Insurance has been
purchased), (ii) any additional premium due Financial Guaranty because
of a purchase of bond(s) by an Insured Fund during the previous month,
and (iii) any single premium due for Secondary Market Insurance
acquired during the prior month.
3.2 Franklin agrees to pay Financial Guaranty on behalf of each Insured
Fund within five business days of Franklin's receipt and acceptance of
the complete premium statement provided for in Section 4.1 one-twelfth
(1/12) of the aggregate of the annual premiums for the bonds listed on
the Schedule A to the Master Policy for each Insured Fund as of the
last business day of the prior month.
3.3 If Financial Guaranty does not receive the premium payment within five
business days of Franklin's receipt of the premium statement, then
Financial Guaranty agrees to notify Franklin by the end of the sixth
business day following the Franklin's receipt of the premium statement
that it has not received said premium payment. All premium payments
due Financial Guaranty which are received by Financial Guaranty on or
before the close of business on the fifth business day following
Franklin's receipt of the premium statement shall not be considered
late. However, if a premium payment is received after the fifth
business day following Franklin's receipt of the premium statement,
Franklin agrees to pay Financial Guaranty in addition to the premium
due, interest at a rate equal to that rate of interest publicly
announced as its base rate from time to time by Citibank, N.A. in New
York, plus one percent per annum for each 24-hour period or portion
thereof payment of the premium is delayed after the fifth business day
following the Franklin's receipt of the premium statement.
3.4 Financial Guaranty agrees that once an Insured Fund purchases a bond
and begins paying a premium for that bond based upon a stated annual
premium rate, neither the annual premium rate nor the secondary market
premium rate for that bond can be changed by Financial Guaranty so
long as the bond is owned by Franklin and insured by Financial
Guaranty under the Master Policies of the Insured Funds or the
Secondary Market Policy referred to in Section 9 herein.
3.5 With or prior to each premium payment, Franklin shall, to the extent
Franklin has notice thereof, notify Financial Guaranty as to any bond
which has been paid prior to maturity, defeased (whether legally or
economically) sold by an Insured Fund or never purchased by such Fund
during the preceding thirty days. Such notification must specify the
amount of bonds affected and identify such bonds by their item number
in Schedule A to the applicable Master Policy. Such notification shall
be deemed sufficient for purposes of entitling Franklin to receive
premium refunds pursuant to the Master Policies. No such notice need
be given as to bonds with respect to which Financial Guaranty has
previously been notified to the same effect.
4. DEFINITIONS.
Financial Guaranty and Franklin agree that the following definitions shall
apply to the interpretation of the Master Policies and the interpretation
of this Agreement.
4.1 "Approved List" is the then current list of municipal securities or
bonds, including premium rate and allocation information, which
Financial Guaranty will insure under the terms of the Master Policies
if Franklin purchases such municipal securities or bonds.
4.2 "Bonds" or "municipal securities" are all of the municipal securities
or bonds purchased by Franklin which are insured under one of the
Master Policies issued to the Insured Funds.
4.3 "Interest Coupons" are the coupons, if any, attached to each of the
bonds.
4.4 "Policy Period" is the period of time commencing with the policy
effective date of a given Master Policy and continuing until the date
of cancellation of said Master Policy under Section 6.1, 6.2, or 6.3
herein.
4.5 "Policy Effective Date" is the first day on which Franklin has
coverage under a given Master Policy issued to an Insured Fund. Each
Master Policy takes effect at 12:01 Pacific Standard Time on the
Policy Effective Date.
4.6 "Purchase Date" is the date on which an Insured Fund purchases a
municipal security and is the first day on which such municipal
security is insured under a given Master Policy.
4.7 In addition to the definitions contained in the Master Policies and
any endorsements thereto, "Due for Payment," when referring to the
principal of a bond, does not refer to any extension or delay in
payment by reason of court order, legislation, or governmental action
of any nature.
5. BOND PURCHASE ALLOCATIONS.
5.1 Financial Guaranty agrees to provide Franklin by a method capable of
producing a written record with an allocation of bonds which Franklin
may purchase and have insured by Financial Guaranty during any
calendar quarter. Once Financial Guaranty makes the allocation, it
agrees not to reduce an allocation for any bond during the course of
that quarter for which the allocation is made. Furthermore, if
Franklin exhausts its allocation for a given bond during a quarter and
if it desires to purchase additional amounts of said bond during the
quarter, Financial Guaranty agrees to use its best efforts to increase
Franklin's allocation of said bonds so as to allow Franklin to make
additional purchases. However, Financial Guaranty reserves the right
to remove from the allocation lists of all its clients, any bond the
credit of which has, in the judgment of Financial Guaranty, materially
deteriorated after it made the quarterly allocations.
6. CANCELLATION OF THE MASTER POLICY.
6.1 The Master Policy is non-cancellable by Financial Guaranty except for
non-payment of premium. if Financial Guaranty has not received a
premium payment for any bond by the 15th business day following the
date on which it was due, it agrees to notify Franklin again of
Franklin's nonpayment. If Financial Guaranty has not received any such
overdue premium payment on or before the next succeeding premium due
date, then the Master Policy(ies) of the Insured Fund(s) with respect
only to the bond or bonds for which the premium payment has not been
received shall be canceled. The effective date of such cancellation
shall be as of the date on which the premium payment was originally
due and all such bonds previously insured thereunder shall cease to be
insured as of that date.
6.2 Franklin reserves the right to cancel the Master Policy upon sixty
(60) days' prior written notice to Financial Guaranty.
6.3 Franklin reserves the right upon thirty (30) days' prior written
notice to Financial Guaranty to discontinue insuring bonds under any
or all of the Master Policies which Franklin purchases after the
effective date of the notice of discontinuance. If Franklin
discontinues insuring any bonds with Financial Guaranty, it shall have
the right to continue to pay premiums to Financial Guaranty and
thereby keep any and/or all of the Master Policies in force for bonds
which are not subject to the notice of discontinuance. In this
situation, a Master Policy will terminate (i) on the date on which the
last principal payment of the last bonds, together with accrued
interest, are received by Franklin or (ii) on the date the last bond
insured under a Master Policy is sold by Franklin, whichever occurs
later. During the period of time in which the Fund keeps the Master
Policies in force, it shall also retain the right to purchase a
Secondary Market Policy for any bonds theretofore insured under the
Master Policy.
7. SECONDARY MARKET INSURANCE CONVERSION OPTION.
7.1 Financial Guaranty hereby grants Franklin the right to purchase, on a
bond-by-bond basis for each and every bond owned by Franklin which is
insured under the Master Policies, Financial Guaranty's Municipal Bond
Secondary Market Insurance Policy ("Secondary Market Policy") in
substantially the form attached to this Agreement as Exhibit 2. The
premium with respect to any Secondary Market Policy for any bond is
payable with the premium payment due in the next succeeding month
following the month in which the bond was sold.
7.2 Franklin's right to purchase the Secondary Market Policy shall apply
to each and every bond held by Franklin under one or more of the
Master Policies, regardless of whether Franklin intends to hold or
sell such bond and regardless of the then existing credit status or
rating of the issuer of said bond.
7.3 Contemporaneously with the issuance of a Secondary Market Policy for
any bond, the coverage of such bond under one or more Master Policies
shall cease and such bond shall be treated as sold for purposes of the
accounting therefor in Section 4.1 herein and no further premium shall
be due under the Master Policy or Policies.
8. APPROVAL OF BOND PURCHASE REQUEST.
8.1 Financial Guaranty agrees to use its best efforts to promptly
research, investigate, and approve or disapprove any request of
Franklin to purchase a bond which is not on Financial Guaranty's then
current Approved List.
9. TIME FOR PAYMENT BY FISCAL AGENT.
9.1 Financial Guaranty will cause its Fiscal Agent to pay Franklin any
principal and/or interest due Franklin because of nonpayment by an
issuer within 30 calendar days after Financial Guaranty has paid the
Fiscal Agent under the provisions of paragraph 2 of each Master
Policy, so long as the evidence requirements under such paragraph are
met. Within 15 days of Financial Guaranty's payment to the Fiscal
Agent, Financial Guaranty is to ascertain if there are any problems
between Franklin and the Fiscal Agent with respect to the neces5ary
evidence Franklin is to provide the Fiscal Agent. If there are any
problems, Financial Guaranty agrees to work with Franklin and the
Fiscal Agent to resolve such problems so that the Fiscal Agent can
make payment within the 30-calendar-day period.
10. CONFIDENTIALITY: FINANCIAL GUARANTY STAFF.
10.1 Financial Guaranty hereby agrees that (except for disclosures required
by law) its staff while employed by Financial Guaranty will not reveal
to any other Financial Guaranty clients, directly or indirectly, the
amount and/or types of municipal bonds purchased by Franklin. In
addition, Financial Guaranty agrees that (except for disclosures
required by law) its staff will not reveal to other Financial Guaranty
clients any information received from Franklin's staff, as a result of
the relationship between Financial Guaranty and Franklin created under
this Agreement, regarding Franklin's business, trading strategy and/or
business practices, and/or any other information which might lessen
Franklin's competitive place in the mutual fund market.
11. CONFIDENTIALITY: FRANKLIN STAFF.
11.1 Franklin hereby agrees that (except for disclosures required by law)
its staff, while employed by Franklin, will not reveal to any
individuals and/or entities outside Franklin, directly or indirectly,
any information concerning the names of the bonds and the issuers on
Financial Guaranty's Approved List, which information the staff
obtains as a result of the relationship between Financial Guaranty and
Franklin created under this Agreement.
12. INFORMATION NOTIFICATION.
12.1 Financial Guaranty agrees promptly to provide Franklin in writing,
from time to time or upon the reasonable written request of Franklin,
with (a) any information concerning any change which would make the
statements in the Registration Statement of Franklin on Form N-lA
("Registration Statement") under the caption "Insurance" relating to
Financial Guaranty and the Master Policies fail to present accurately
and fairly the summary information set forth therein or omit any
material fact with respect to the description of Financial Guaranty
relevant to the material terms of the Master Policies and/or Financial
Guaranty's ability to meet its obligations under the Master Policies
and (b) any information concerning any material adverse change in
Financial Guaranty's financial condition since the date of the
financial information relating to Financial Guaranty which was
included in the Registration Statement. The purpose for providing this
information to Franklin is to keep the information in the Registration
Statement current for so long as the Prospectus and Statement of
Addition Information in such Registration Statement, as amended or
supplemented, is required to be delivered in connection with the
offer, sale, or resale of shares of the Funds.
13. GENERAL PROVISIONS.
13.1 Headings. Headings and subheadings are provided in this Agreement for
convenience only and are not to be taken to modify in any way the
provisions with which they are associated or any other provisions.
13.2 Severability of Provisions. If any provision of this Agreement is held
to be unenforceable or in conflict with the law of any state or of the
United States, the remainder of this Agreement is to be considered
valid and enforceable according to its terms, and the Agreement is to
be construed as if such unenforceable provisions had never been
contained in it.
13.3 Waiver. A waiver of any breach of any provision of this Agreement is
not be construed as a continuing waiver of other breaches of the same
or other provisions of this Agreement. Furthermore, performance of any
obligation required of a party under this Agreement may be waived only
by written waiver signed by the other party. Such a waiver is to be
effective only with respect to the specific obligations described in
the waiver.
13.4 Limitation of Franklin's Liability. Financial Guaranty acknowledges
that it has received notice of and accepts the limitations of
Franklin's liability set forth in Article VIII of its Agreement and
Declaration of Trust. Financial Guaranty agrees that Franklin's
obligations hereunder shall be limited to Franklin and to its assets
and that Financial Guaranty its affiliates, successors or assigns
shall not seek satisfaction of any such obligation from the
shareholders of Franklin nor from any Trustee, officer, employee, or
agent of Franklin.
13.5 Remedy. Unless specifically provided ill this Agreement, no remedy
available to either party under this Agreement is intended to be
exclusive of any other remedy. Furthermore, each and every remedy is
to be cumulative and is to be in addition to every other remedy
provided under this Agreement or available at law or in equity.
13.6 Amendments. All amendments or modifications of this Agreement are to
be binding upon the parties so long as such amendments are in writing
and executed by both parties.
13.7 Successor and Assigns. This Agreement is to be binding upon and shall
inure to the benefit of each of the parties, and, except as otherwise
provided in this Agreement, to their respective legal successors and
assigns.
13.8 Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party
is to be entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which such party is
entitled.
13.9 General Assurances. The parties agree to execute, acknowledge, and
deliver all such further instruments and do all such other acts as may
be appropriate in order to carry out the intent and purposes of this
Agreement.
13.10 Notices. Any notice, request, or communication required under this
Agreement is to be in writing and is for all purposes deemed to be
fully given if sent by telegram, if delivered personally, or if
mailed, postage prepaid, return receipt requested by certified or
registered mail, to the respective parties at the addresses set forth
at the beginning of this Agreement. Either party may change its
address for the purposes of this Agreement by giving the ' other party
written notice of its new address. A communication, if received after
the date on which it is due, will nevertheless be considered timely if
it was mailed at least seven (7) days prior to the date on which it
was due.
13.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which is to be deemed an original, but all such
counterparts together constitute one and the same instrument.
13.12 Force Majeure. Neither party will be liable in damages or will be
considered in breach for any delay or default in performing under this
Agreement if such delay or default is caused by conditions beyond its
control, including but not limited to acts of God, government
restriction, wars or insurrections, strikes, fires, floods, severe
weather, work stoppages, lockouts, lack of materials, default of a
common carrier, or similar occurrences.
13.13 Governing Law. This Agreement is to be interpreted and construed, and
the legal relations created by it are to be determined, in accordance
with the laws of the State of New York.
13.14 Entire Agreement. This Agreement and the Exhibits thereto constitute
the sole and only Agreement of the parties with respect to the subject
matter hereof. They supersede any and all prior or contemporaneous
oral or written agreements, proposals, understandings, promises,
negotiations, representations, or communications between the parties
relating to this Agreement and all past course of dealing or industry
custom, all of which are merged herein. If any provision in Financial
Guaranty operations Manual is in conflict with this Agreement, this
Agreement will control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date first above written.
FRANKLIN TAX-FREE TRUST
By: /s/ DEBORAH R. GATZEK
Title: V.P. Secretary
FINANCIAL GUARANTY INSURANCE COMPANY
By: /s/ RICHARD A PRICE
Richard A. Price
Managing Director
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services
("Subcontract") is made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a
California corporation, hereinafter called the "Investment Manager," and
FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and the
rules and regulations thereunder, and under other applicable state and federal
laws; and maintaining books and records for the Fund (other than those
maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel needed
to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Subcontract shall become effective on the date written above
and shall continue in effect as to each Investment Company and each Fund so long
as (1) the Agreement applicable to the Investment Company or Fund is in effect
and (2) this Subcontract is not terminated. This Subcontract will terminate as
to any Investment Company or Fund immediately upon the termination of the
Agreement applicable to the Investment Company or Fund, and may in addition be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ HARMON E. BURNS
Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree that
the Subcontracts for Administrative Services between them dated: (1) August 28,
1996 for the Franklin Templeton Global Trust on behalf of all series of the
Trust; (2) July 24, 1995 for the Franklin Templeton International Trust on
behalf of its series Templeton Foreign Smaller Companies Fund (formerly known as
Franklin International Equity Fund); (3) July 18, 1995 for the Franklin
Templeton International Trust on behalf of its series Templeton Pacific Growth
Fund; and (4) July 14, 1995 for the Franklin Investors Securities Trust on
behalf of its series Franklin Global Government Income Fund are terminated
effective as of the date of the Subcontract for Fund Administrative Services
above.
FRANKLIN ADVISERS, INC.
By /s/ HARMON E. BURNS
Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/ MARTIN L. FLANAGAN
Martin L. Flanagan
President, CEO
AMENDMENT TO SUBCONTRACT FOR
FUND ADMINISTRATIVE SERVICES
The Subcontract for Fund Administrative Services dated October 1, 1996
between FRANKLIN ADVISERS, INC. and FRANKLIN TEMPLETON SERVICES, INC. is hereby
amended, to replace Exhibit A with the attached Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ HARMON E. BURNS
Harmon E. Burns
Executive Vice President
Date: March 11, 1998
<TABLE>
<CAPTION>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin High Income Trust AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income
Fund, Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free Income Fund
Franklin Custodian Funds, Inc. Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fun
Franklin Federal Tax- Free Income
Fund
Franklin Gold Fund
Franklin Investors Securities Trust Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio*
Franklin Strategic Series Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Templeton International Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
- -----------------------------------------------------------------------------------------------------------------
* Effective as of February 26, 1998
</TABLE>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract") is
made as of October 1, 1996 between FRANKLIN INVESTMENT ADVISORY SERVICES, INC.,
a Connecticut corporation, hereinafter called the "Investment Manager," and
FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and the
rules and regulations thereunder, and under other applicable state and federal
laws; and maintaining books and records for the Fund (other than those
maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Subcontract shall become effective on the date written above
and shall continue in effect as to each Investment Company and each Fund so long
as (1) the Agreement applicable to the Investment Company or Fund is in effect
and (2) this Subcontract is not terminated. This Subcontract will terminate as
to any Investment Company or Fund immediately upon the termination of the
Agreement applicable to the Investment Company or Fund, and may in addition be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to
be executed by their duly authorized officers.
FRANKLIN INVESTMENT ADVISORY SERVICES, INC.
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ HARMON E. BURNS
Harmon E. Burns
Title: Executive Vice President
<TABLE>
<CAPTION>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN INVESTMENT ADVISORY SERVICES, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- -----------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust Franklin New York Intermediate-Term Tax-Free Income Fund
Franklin Tax-Free Trust Franklin Connecticut Tax-Free Income Fund
- -----------------------------------------------------------------------------------------------------------
</TABLE>
AMENDMENT TO SUBCONTRACT FOR
FUND ADMINISTRATIVE SERVICES
The Subcontract for Fund Administrative Services dated October 1, 1996
between FRANKLIN INVESTMENT ADVISORY SERVICES, INC. and FRANKLIN TEMPLETON
SERVICES, INC. is hereby amended, effective July 1, 1997 to add Franklin
Custodian Funds, Inc., Growth Series to the list of funds in Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers.
FRANKLIN INVESTMENT ADVISORY SERVICES, INC.
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ HARMON E. BURNS
Harmon E. Burns
Executive Vice President
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8024
April 17, 1998
Franklin Tax-Free Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Amended and Restated Agreement and Declaration of
Trust (the "Declaration of Trust") of Franklin Tax-Free Trust (the "Trust"), a
business trust organized under the laws of the State of Massachusetts on
September 18, 1984, the By-Laws of the Trust, and the resolutions adopted by the
Trust's Board of Trustees organizing the business of the Trust, all as amended
to date, and the various pertinent proceedings we deem material. We have also
examined the Notification of Registration and the Registration Statements filed
under the Investment Company Act of 1940 (the "Investment Company Act") and the
Securities Act of 1933 (the "Securities Act"), all as amended to date, as well
as other items we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an unlimited
number of shares of beneficial interest without a par value. The Trust currently
issues shares of the Franklin Arizona Insured Tax-Free Income Fund; Frankin
Florida Insured Tax-Free Income Fund; Franklin Insured Tax-Free Income Fund;
Frankin Massachusetts Insured Tax-Free Income Fund; Franklin Michigan Insured
Tax-Free Income Fund; Franklin Minnesota Insured Tax-Free Income Fund; Franklin
Ohio Insured Tax-Free Income Fund; Franklin Arizona Tax-Free Income Fund;
Franklin Colorado Tax-Free Income Fund; Franklin Connecticut Tax-Free Income
Fund; Franklin High Yield 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; 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; Franklin Virginia Tax-Free Income Fund; and
Franklin Federal Intermediate-Term Tax-Free Income Fund. The Declaration of
Trust designates, or authorizes the Trustees to designate, one or more series or
classes of shares of the Trust, and allocates, or authorizes the Trustees to
allocate, shares of beneficial interest to each such series or class. The
Declaration of Trust also empowers the Trustees to designate any additional
series or classes and allocate shares to such series or classes.
The Trust has filed with the U.S. Securities and Exchange Commission (the
"Commission"), a Registration Statement under the Securities Act, which
Registration Statement is deemed to register an indefinite number of shares of
the Trust pursuant to the provisions of Rule 24f-2 under the Investment Company
Act. You have further advised us that the Trust has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 perfecting the
registration of the shares sold by the Trust during each fiscal year during
which such registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Trust have been, and will
continue to be, sold in accordance with the Trust's usual method of distributing
its registered shares, under which prospectuses are made available for delivery
to offerees and purchasers of such shares in accordance with Section 5(b) of the
Securities Act.
Based upon the foregoing information and examination, so long as the Trust
remains a valid and subsisting trust under the laws of the State of
Massachusetts, and the registration of an indefinite number of shares of the
Trust remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of Trust,
and subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will have
all the rights provided for with respect to such holding by the Declaration of
Trust and the laws of the State of Massachusetts.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Trust are offered, and we further consent to reference in the
registration statement of the Trust to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /S/ BRUCE G LETO
Bruce G. Leto
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 25
to the Registration Statement of Franklin Tax-Free Trust on Form N-1A (File No.
2-94222) of our report dated April 3, 1998 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,
1998, which is incorporated by reference in the Registration Statement.
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
April 27, 1998
POWER OF ATTORNEY
The undersigned officers and trustees of Franklin Tax-Free Trust (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute,
file or withdraw any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 19TH day of March, 1998.
/S/ RUPERT H. JOHNSON, JR. /S/ CHARLES B. JOHNSON
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ EDITH E. HOLIDAY
S. Joseph Fortunato, Edith E. Holiday,
Trustee Trustee
/S/ FRANK W. T. LAHAYE /S/ GORDON S. MACKLIN
Frank W. T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/S/ DIOMEDES LOO-TAM /S/ MARTIN L. FLANAGAN
Diomedes Loo-Tam, Martin L. Flanagan,
Principal Accounting Officer Principal Financial Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN TAX-FREE TRUST
(the "Trust").
As Secretary of the Trust, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held at
777 Mariners Island Boulevard, San Mateo, California, on March 19, 1998.
RESOLVED, that a Power of Attorney, substantially in the
form of the Power of Attorney presented to this Board,
appointing Mark H. Plafker, Harmon E. Burns, Deborah R.
Gatzek, Karen L. Skidmore and Larry L. Greene as
attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by a
majority of the Trustees and designated officers.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/S/ DEBORAH R. GATZEK
Dated: March 19, 1998 Deborah R. Gatzek
Secretary
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
each of the Boards of Directors or Trustees ("Boards") of the Franklin Funds and
Fund series listed on the attached Schedule A (the "Funds"). The Boards have
determined that the Plan is in the best interests of each class and each Fund as
a whole. The Plan sets forth the provisions relating to the establishment of
multiple classes of shares for each Fund.
1. Each Fund shall offer two classes of shares, to be known as Class I and
Class II.
2. Class I shares shall carry a front-end sales charge ranging from 0% -
4.50%, and Class II shares shall carry a front-end sales charge 1.00%, all as
set forth in each Fund's Prospectus.
3. Class I shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in each Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% of the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in each Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or other for
expenses incurred in the promotion and distribution of the shares of Class I.
Such expenses include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution -related
expenses including a prorated portion of the Distributor's overhead expenses
attributable to the distribution of Class I shares, as well as any distribution
or service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Fund for Class I shares or with the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two components. The
first component is a shareholder servicing fee, to be paid to broker-dealers,
banks, trust companies and others who will provide personal assistance to
shareholders in servicing their accounts. The second component is an asset-based
sales charge to be retained by the Distributor during the first year after sale
of shares, and, in subsequent years, to be paid to dealers or retained by the
Distributor to be used in the promotion and distribution of Class II shares, in
a manner similar to that described above for Class I shares.
The Plans shall operate in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, section
26(d).
6. The only difference in expenses as between Class I and Class II shares
shall relate to differences in the Rule 12b-1 plan expenses of each class, as
described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the Class I and
Class II shares.
8. Shares of either Class may be exchanged for shares of another investment
company within the Franklin Templeton Group of Funds according to the terms and
conditions stated in each fund's prospectus, as it may be amended from time to
time, to the extent permitted by the Investment Company Act of 1940 and the
rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule 12b-1 Plan
related to that Class.
10. On an ongoing basis, each Fund's Board pursuant to the fiduciary
responsibilities under the 1940 Act and otherwise, will monitor each Fund for
the existence of any material conflicts between the interests of the two classes
of shares. Each Board, including a majority of the independent Board members,
shall take such action as is reasonably necessary to eliminate any such conflict
that may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors,
Inc. shall be responsible for alerting the Board to any material conflicts that
arise.
11. All material amendments to this Plan must be approved by a majority of
the Board members of each Fund, including a majority of the Board members who
are not interested persons of each Fund.
I, Deborah R. Gatzek, Secretary of the Franklin Funds, do hereby certify
that this Multiple Class Plan has been adopted by a majority of each of the
Boards of Directors or Trustees of the Franklin Funds and Fund series listed on
the attached Schedule A on April 18, 1995.
Date: October 19, 1995 By: /S/ DEBORAH R. GATZEK
---------------------
Deborah R. Gatzek
Secretary
<TABLE>
<CAPTION>
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
- ------------------ --------------------------
<S> <C>
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income Fund -Class II; 216
Income Fund
Franklin Managed Trust Franklin Rising Dividends Fund - Class II; 258
Franklin California Tax-Free Trust Franklin California Insured Tax-Free
Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Strategic Series Franklin Global Utilities Fund - Class II; 297
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
- ------------------ --------------------------
<S> <C>
Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund - Class II; 264
Franklin Arizona Tax-Free Income Fund - Class II; 226
Franklin Colorado Tax-Free Income Fund - Class II; 227
Franklin Connecticut Tax Free Income Fund - Class II; 266
Franklin Florida Tax-Free Income Fund - Class II; 265
Franklin Georgia Tax-Free Income Fund - Class II; 228
Franklin High Yield Tax-Free Income Fund - Class II; 230
Franklin Insured Tax-Free Income Fund - Class II; 221
Franklin Louisiana Tax-Free Income Fund - Class II; 268
Franklin Maryland Tax-Free Income Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free Income
Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund - Class II; 260
Franklin New Jersey Tax-Free Income Fund - Class II; 271
Franklin North Carolina Tax-Free Income Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income Fund - Class II; 222
Franklin Oregon Tax-Free Income Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income Fund - Class II; 223
Franklin Texas Tax-Free Income Fund - Class II; 262
Franklin Virginia Tax-Free Income Fund - Class II; 263
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST February 28, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN INSURED TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,596,657,378
<INVESTMENTS-AT-VALUE> 1,710,632,870
<RECEIVABLES> 26,048,509
<ASSETS-OTHER> 1,727,235
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,738,408,614
<PAYABLE-FOR-SECURITIES> 9,070,307
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,021,124
<TOTAL-LIABILITIES> 15,091,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,603,423,512
<SHARES-COMMON-STOCK> 136,849,855
<SHARES-COMMON-PRIOR> 136,753,285
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (851,836)
<ACCUMULATED-NET-GAINS> 6,770,015
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 113,975,492
<NET-ASSETS> 1,723,317,183
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 102,645,300
<OTHER-INCOME> 0
<EXPENSES-NET> (10,554,632)
<NET-INVESTMENT-INCOME> 92,090,668
<REALIZED-GAINS-CURRENT> 23,962,647
<APPREC-INCREASE-CURRENT> 16,269,424
<NET-CHANGE-FROM-OPS> 132,322,789
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (91,520,628)
<DISTRIBUTIONS-OF-GAINS> (16,811,655)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,269,623
<NUMBER-OF-SHARES-REDEEMED> (21,131,863)
<SHARES-REINVESTED> 3,958,810
<NET-CHANGE-IN-ASSETS> 39,708,532
<ACCUMULATED-NII-PRIOR> 20,740
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (37,322)
<GROSS-ADVISORY-FEES> (7,894,099)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10,554,632)
<AVERAGE-NET-ASSETS> 1,697,545,239
<PER-SHARE-NAV-BEGIN> 12.150
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .290
<PER-SHARE-DIVIDEND> (.670)
<PER-SHARE-DISTRIBUTIONS> (.120)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.310
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,596,657,378
<INVESTMENTS-AT-VALUE> 1,710,632,870
<RECEIVABLES> 26,048,509
<ASSETS-OTHER> 1,727,235
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,738,408,614
<PAYABLE-FOR-SECURITIES> 9,070,307
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,021,124
<TOTAL-LIABILITIES> 15,091,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,603,423,512
<SHARES-COMMON-STOCK> 3,074,478
<SHARES-COMMON-PRIOR> 1,762,895
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (851,836)
<ACCUMULATED-NET-GAINS> 6,770,015
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 113,975,492
<NET-ASSETS> 1,723,317,183
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 102,645,300
<OTHER-INCOME> 0
<EXPENSES-NET> (10,554,632)
<NET-INVESTMENT-INCOME> 92,090,668
<REALIZED-GAINS-CURRENT> 23,962,647
<APPREC-INCREASE-CURRENT> 16,269,424
<NET-CHANGE-FROM-OPS> 132,322,789
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,442,616)
<DISTRIBUTIONS-OF-GAINS> (343,655)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,667,248
<NUMBER-OF-SHARES-REDEEMED> (450,124)
<SHARES-REINVESTED> 94,459
<NET-CHANGE-IN-ASSETS> 39,708,532
<ACCUMULATED-NII-PRIOR> 20,740
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (37,322)
<GROSS-ADVISORY-FEES> (7,894,099)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10,554,632)
<AVERAGE-NET-ASSETS> 1,697,545,239
<PER-SHARE-NAV-BEGIN> 12.210
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> .290
<PER-SHARE-DIVIDEND> (.600)
<PER-SHARE-DISTRIBUTIONS> (.120)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.380
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 318,207,175
<INVESTMENTS-AT-VALUE> 340,045,683
<RECEIVABLES> 8,442,604
<ASSETS-OTHER> 24,443
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 348,512,730
<PAYABLE-FOR-SECURITIES> 4,905,280
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,524,186
<TOTAL-LIABILITIES> 6,429,466
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 318,991,353
<SHARES-COMMON-STOCK> 27,917,603
<SHARES-COMMON-PRIOR> 28,162,462
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (210,542)
<ACCUMULATED-NET-GAINS> 1,463,945
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,838,508
<NET-ASSETS> 342,083,264
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20,130,653
<OTHER-INCOME> 0
<EXPENSES-NET> (2,369,016)
<NET-INVESTMENT-INCOME> 17,761,637
<REALIZED-GAINS-CURRENT> 4,132,958
<APPREC-INCREASE-CURRENT> 6,206,833
<NET-CHANGE-FROM-OPS> 28,101,428
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,485,323)
<DISTRIBUTIONS-OF-GAINS> (3,803,786)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,519,323
<NUMBER-OF-SHARES-REDEEMED> (4,661,188)
<SHARES-REINVESTED> 897,006
<NET-CHANGE-IN-ASSETS> 10,640,418
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,252,824
<OVERDISTRIB-NII-PRIOR> (36,705)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,792,766)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,369,016)
<AVERAGE-NET-ASSETS> 341,962,591
<PER-SHARE-NAV-BEGIN> 11.540
<PER-SHARE-NII> 0.610
<PER-SHARE-GAIN-APPREC> 0.350
<PER-SHARE-DIVIDEND> (0.620)
<PER-SHARE-DISTRIBUTIONS> (0.130)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.750
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 318,207,175
<INVESTMENTS-AT-VALUE> 340,045,683
<RECEIVABLES> 8,442,604
<ASSETS-OTHER> 24,443
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 348,512,730
<PAYABLE-FOR-SECURITIES> 4,905,280
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,524,186
<TOTAL-LIABILITIES> 6,429,466
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 318,991,353
<SHARES-COMMON-STOCK> 1,180,684
<SHARES-COMMON-PRIOR> 550,431
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (210,542)
<ACCUMULATED-NET-GAINS> 1,463,945
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,838,508
<NET-ASSETS> 342,083,264
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20,130,653
<OTHER-INCOME> 0
<EXPENSES-NET> (2,369,016)
<NET-INVESTMENT-INCOME> 17,761,637
<REALIZED-GAINS-CURRENT> 4,132,958
<APPREC-INCREASE-CURRENT> 6,206,833
<NET-CHANGE-FROM-OPS> 28,101,428
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (450,151)
<DISTRIBUTIONS-OF-GAINS> (118,051)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 765,610
<NUMBER-OF-SHARES-REDEEMED> (172,483)
<SHARES-REINVESTED> 37,126
<NET-CHANGE-IN-ASSETS> 10,640,418
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,252,824
<OVERDISTRIB-NII-PRIOR> (36,705)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,792,766)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,369,016)
<AVERAGE-NET-ASSETS> 341,962,591
<PER-SHARE-NAV-BEGIN> 11.590
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> 0.340
<PER-SHARE-DIVIDEND> (0.550)
<PER-SHARE-DISTRIBUTIONS> (0.130)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.800
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,098,383,245
<INVESTMENTS-AT-VALUE> 1,177,395,294
<RECEIVABLES> 20,235,221
<ASSETS-OTHER> 6,499,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,204,129,795
<PAYABLE-FOR-SECURITIES> 24,400,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,291,938
<TOTAL-LIABILITIES> 28,692,324
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,094,753,001
<SHARES-COMMON-STOCK> 93,666,608
<SHARES-COMMON-PRIOR> 92,589,471
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,346,656)
<ACCUMULATED-NET-GAINS> 3,019,077
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 79,012,049
<NET-ASSETS> 1,175,437,471
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 67,328,888
<OTHER-INCOME> 0
<EXPENSES-NET> (7,411,065)
<NET-INVESTMENT-INCOME> 59,917,823
<REALIZED-GAINS-CURRENT> 10,732,851
<APPREC-INCREASE-CURRENT> 21,097,599
<NET-CHANGE-FROM-OPS> 91,748,273
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59,839,551)
<DISTRIBUTIONS-OF-GAINS> (12,008,053)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,753,171
<NUMBER-OF-SHARES-REDEEMED> (9,724,796)
<SHARES-REINVESTED> 3,048,762
<NET-CHANGE-IN-ASSETS> 43,738,500
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,579,103
<OVERDISTRIB-NII-PRIOR> (213,723)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,414,427
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,411,065
<AVERAGE-NET-ASSETS> 1,146,399,915
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .63
<PER-SHARE-GAIN-APPREC> .34
<PER-SHARE-DIVIDEND> (.64)
<PER-SHARE-DISTRIBUTIONS> (.13)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.20
<EXPENSE-RATIO> .63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,098,383,245
<INVESTMENTS-AT-VALUE> 1,177,395,294
<RECEIVABLES> 20,235,221
<ASSETS-OTHER> 6,499,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,204,129,795
<PAYABLE-FOR-SECURITIES> 24,400,386
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,291,938
<TOTAL-LIABILITIES> 28,692,324
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,094,753,001
<SHARES-COMMON-STOCK> 2,679,153
<SHARES-COMMON-PRIOR> 1,670,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,346,656)
<ACCUMULATED-NET-GAINS> 3,019,077
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 79,012,049
<NET-ASSETS> 1,175,437,471
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 67,328,888
<OTHER-INCOME> 0
<EXPENSES-NET> (7,411,065)
<NET-INVESTMENT-INCOME> 59,917,823
<REALIZED-GAINS-CURRENT> 10,732,851
<APPREC-INCREASE-CURRENT> 21,097,599
<NET-CHANGE-FROM-OPS> 91,748,273
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,211,205)
<DISTRIBUTIONS-OF-GAINS> (284,824)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,286,100
<NUMBER-OF-SHARES-REDEEMED> (364,733)
<SHARES-REINVESTED> 87,059
<NET-CHANGE-IN-ASSETS> 43,738,500
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,579,103
<OVERDISTRIB-NII-PRIOR> (213,723)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,414,427
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,411,065
<AVERAGE-NET-ASSETS> 1,146,399,915
<PER-SHARE-NAV-BEGIN> 12.07
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .33
<PER-SHARE-DIVIDEND> (.57)
<PER-SHARE-DISTRIBUTIONS> (.13)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.27
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 473,973,445
<INVESTMENTS-AT-VALUE> 501,080,041
<RECEIVABLES> 5,728,706
<ASSETS-OTHER> 2,281,350
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 509,090,097
<PAYABLE-FOR-SECURITIES> 1,987,996
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,656,359
<TOTAL-LIABILITIES> 3,644,355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 478,065,923
<SHARES-COMMON-STOCK> 40,727,502
<SHARES-COMMON-PRIOR> 40,157,975
<ACCUMULATED-NII-CURRENT> 157,545
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 115,678
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,106,596
<NET-ASSETS> 505,445,742
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29,224,690
<OTHER-INCOME> 0
<EXPENSES-NET> (3,287,864)
<NET-INVESTMENT-INCOME> 25,936,826
<REALIZED-GAINS-CURRENT> 4,596,300
<APPREC-INCREASE-CURRENT> 5,746,112
<NET-CHANGE-FROM-OPS> 36,279,238
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,706,309)
<DISTRIBUTIONS-OF-GAINS> (3,868,308)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,600,732
<NUMBER-OF-SHARES-REDEEMED> (4,323,207)
<SHARES-REINVESTED> 1,292,002
<NET-CHANGE-IN-ASSETS> 18,474,599
<ACCUMULATED-NII-PRIOR> 263,020
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (543,789)
<GROSS-ADVISORY-FEES> (2,465,946)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,287,864)
<AVERAGE-NET-ASSETS> 492,025,722
<PER-SHARE-NAV-BEGIN> 12.010
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .250
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.160
<EXPENSE-RATIO> .650
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 473,973,445
<INVESTMENTS-AT-VALUE> 501,080,041
<RECEIVABLES> 5,728,706
<ASSETS-OTHER> 2,281,350
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 509,090,097
<PAYABLE-FOR-SECURITIES> 1,987,996
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,656,359
<TOTAL-LIABILITIES> 3,644,355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 478,065,923
<SHARES-COMMON-STOCK> 829,737
<SHARES-COMMON-PRIOR> 402,074
<ACCUMULATED-NII-CURRENT> 157,545
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 115,678
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,106,596
<NET-ASSETS> 505,445,742
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 29,224,690
<OTHER-INCOME> 0
<EXPENSES-NET> (3,287,864)
<NET-INVESTMENT-INCOME> 25,936,826
<REALIZED-GAINS-CURRENT> 4,596,300
<APPREC-INCREASE-CURRENT> 5,746,112
<NET-CHANGE-FROM-OPS> 36,279,238
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (335,992)
<DISTRIBUTIONS-OF-GAINS> (68,525)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 456,070
<NUMBER-OF-SHARES-REDEEMED> (50,255)
<SHARES-REINVESTED> 21,848
<NET-CHANGE-IN-ASSETS> 18,474,599
<ACCUMULATED-NII-PRIOR> 263,020
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (543,789)
<GROSS-ADVISORY-FEES> (2,465,946)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,287,864)
<AVERAGE-NET-ASSETS> 492,025,722
<PER-SHARE-NAV-BEGIN> 12.050
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> .260
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.210
<EXPENSE-RATIO> 1.220
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 710,303,279
<INVESTMENTS-AT-VALUE> 761,133,140
<RECEIVABLES> 14,480,633
<ASSETS-OTHER> 501,965
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 776,115,738
<PAYABLE-FOR-SECURITIES> 3,760,204
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,097,875
<TOTAL-LIABILITIES> 6,858,079
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 718,284,371
<SHARES-COMMON-STOCK> 59,513,390
<SHARES-COMMON-PRIOR> 57,279,612
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (434,981)
<ACCUMULATED-NET-GAINS> 578,408
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,829,861
<NET-ASSETS> 769,257,659
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,438,906
<OTHER-INCOME> 0
<EXPENSES-NET> (4,870,559)
<NET-INVESTMENT-INCOME> 38,568,347
<REALIZED-GAINS-CURRENT> 5,741,354
<APPREC-INCREASE-CURRENT> 14,279,319
<NET-CHANGE-FROM-OPS> 58,589,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,780,652)
<DISTRIBUTIONS-OF-GAINS> (3,968,675)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,967,848
<NUMBER-OF-SHARES-REDEEMED> (6,397,990)
<SHARES-REINVESTED> 1,663,920
<NET-CHANGE-IN-ASSETS> 55,111,984
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (258,857)
<OVERDIST-NET-GAINS-PRIOR> (1,059,282)
<GROSS-ADVISORY-FEES> (3,586,169)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,870,559)
<AVERAGE-NET-ASSETS> 738,378,517
<PER-SHARE-NAV-BEGIN> 12.190
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .330
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.070)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.450
<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, 1998 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> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 710,303,279
<INVESTMENTS-AT-VALUE> 761,133,140
<RECEIVABLES> 14,480,633
<ASSETS-OTHER> 501,965
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 776,115,738
<PAYABLE-FOR-SECURITIES> 3,760,204
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,097,875
<TOTAL-LIABILITIES> 6,858,079
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 718,284,371
<SHARES-COMMON-STOCK> 2,251,795
<SHARES-COMMON-PRIOR> 1,289,184
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (434,981)
<ACCUMULATED-NET-GAINS> 578,408
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,829,861
<NET-ASSETS> 769,257,659
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,438,906
<OTHER-INCOME> 0
<EXPENSES-NET> (4,870,559)
<NET-INVESTMENT-INCOME> 38,568,347
<REALIZED-GAINS-CURRENT> 5,741,354
<APPREC-INCREASE-CURRENT> 14,279,319
<NET-CHANGE-FROM-OPS> 58,589,020
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (963,819)
<DISTRIBUTIONS-OF-GAINS> (134,989)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,087,152
<NUMBER-OF-SHARES-REDEEMED> (188,923)
<SHARES-REINVESTED> 64,382
<NET-CHANGE-IN-ASSETS> 55,111,984
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (258,857)
<OVERDIST-NET-GAINS-PRIOR> (1,059,282)
<GROSS-ADVISORY-FEES> (3,586,169)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,870,559)
<AVERAGE-NET-ASSETS> 738,378,517
<PER-SHARE-NAV-BEGIN> 12.240
<PER-SHARE-NII> .580
<PER-SHARE-GAIN-APPREC> .340
<PER-SHARE-DIVIDEND> (.580)
<PER-SHARE-DISTRIBUTIONS> (.070)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.510
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 195,112,122
<INVESTMENTS-AT-VALUE> 210,029,879
<RECEIVABLES> 3,268,281
<ASSETS-OTHER> 2,810,747
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,108,907
<PAYABLE-FOR-SECURITIES> 1,432,368
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 736,803
<TOTAL-LIABILITIES> 2,169,171
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 198,904,046
<SHARES-COMMON-STOCK> 17,732,666
<SHARES-COMMON-PRIOR> 16,724,178
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (47,259)
<ACCUMULATED-NET-GAINS> 165,192
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,917,757
<NET-ASSETS> 213,939,736
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,284,332
<OTHER-INCOME> 0
<EXPENSES-NET> (1,528,150)
<NET-INVESTMENT-INCOME> 10,756,182
<REALIZED-GAINS-CURRENT> 166,654
<APPREC-INCREASE-CURRENT> 6,082,031
<NET-CHANGE-FROM-OPS> 17,004,867
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,578,866)
<DISTRIBUTIONS-OF-GAINS> (237,542)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,415,410
<NUMBER-OF-SHARES-REDEEMED> (1,854,307)
<SHARES-REINVESTED> 447,385
<NET-CHANGE-IN-ASSETS> 19,735,298
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 238,515
<OVERDISTRIB-NII-PRIOR> (107,458)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,137,320)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,528,150)
<AVERAGE-NET-ASSETS> 201,407,766
<PER-SHARE-NAV-BEGIN> 11.510
<PER-SHARE-NII> 0.620
<PER-SHARE-GAIN-APPREC> 0.360
<PER-SHARE-DIVIDEND> (0.620)
<PER-SHARE-DISTRIBUTIONS> (0.010)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.860
<EXPENSE-RATIO> 0.750
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 195,112,122
<INVESTMENTS-AT-VALUE> 210,029,879
<RECEIVABLES> 3,268,281
<ASSETS-OTHER> 2,810,747
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,108,907
<PAYABLE-FOR-SECURITIES> 1,432,368
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 736,803
<TOTAL-LIABILITIES> 2,169,171
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 198,904,046
<SHARES-COMMON-STOCK> 304,525
<SHARES-COMMON-PRIOR> 145,675
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (47,259)
<ACCUMULATED-NET-GAINS> 165,192
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,917,757
<NET-ASSETS> 213,939,736
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,284,332
<OTHER-INCOME> 0
<EXPENSES-NET> (1,528,150)
<NET-INVESTMENT-INCOME> 10,756,182
<REALIZED-GAINS-CURRENT> 166,654
<APPREC-INCREASE-CURRENT> 6,082,031
<NET-CHANGE-FROM-OPS> 17,004,867
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (117,117)
<DISTRIBUTIONS-OF-GAINS> (2,435)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 194,122
<NUMBER-OF-SHARES-REDEEMED> (40,740)
<SHARES-REINVESTED> 5,468
<NET-CHANGE-IN-ASSETS> 19,735,298
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 238,515
<OVERDISTRIB-NII-PRIOR> (107,458)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,137,320)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,528,150)
<AVERAGE-NET-ASSETS> 201,407,766
<PER-SHARE-NAV-BEGIN> 11.530
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.340
<PER-SHARE-DIVIDEND> (0.550)
<PER-SHARE-DISTRIBUTIONS> (0.010)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.870
<EXPENSE-RATIO> 1.310
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 5,687,888,403
<INVESTMENTS-AT-VALUE> 6,138,485,989
<RECEIVABLES> 117,456,164
<ASSETS-OTHER> 13,108,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,269,050,610
<PAYABLE-FOR-SECURITIES> 80,964,719
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,883,070
<TOTAL-LIABILITIES> 102,847,789
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,731,051,999
<SHARES-COMMON-STOCK> 491,518,335
<SHARES-COMMON-PRIOR> 402,071,454
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4,517,342)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (10,929,422)
<ACCUM-APPREC-OR-DEPREC> 450,597,586
<NET-ASSETS> 6,166,202,821
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 347,062,083
<OTHER-INCOME> 0
<EXPENSES-NET> (34,068,543)
<NET-INVESTMENT-INCOME> 312,993,540
<REALIZED-GAINS-CURRENT> 37,029,261
<APPREC-INCREASE-CURRENT> 187,205,403
<NET-CHANGE-FROM-OPS> 537,228,204
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (298,241,773)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 131,051,149
<NUMBER-OF-SHARES-REDEEMED> (52,168,755)
<SHARES-REINVESTED> 10,564,487
<NET-CHANGE-IN-ASSETS> 1,466,545,289
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,265,863)
<OVERDIST-NET-GAINS-PRIOR> (47,958,683)
<GROSS-ADVISORY-FEES> (24,164,691)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (34,068,543)
<AVERAGE-NET-ASSETS> 5,266,799,562
<PER-SHARE-NAV-BEGIN> 11.210
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> .470
<PER-SHARE-DIVIDEND> (.690)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.680
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 5,687,888,403
<INVESTMENTS-AT-VALUE> 6,138,485,989
<RECEIVABLES> 117,456,164
<ASSETS-OTHER> 13,108,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,269,050,610
<PAYABLE-FOR-SECURITIES> 80,964,719
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,883,070
<TOTAL-LIABILITIES> 102,847,789
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,731,051,999
<SHARES-COMMON-STOCK> 36,010,695
<SHARES-COMMON-PRIOR> 17,258,275
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4,517,342)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (10,929,422)
<ACCUM-APPREC-OR-DEPREC> 450,597,586
<NET-ASSETS> 6,166,202,821
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 347,062,083
<OTHER-INCOME> 0
<EXPENSES-NET> (34,068,543)
<NET-INVESTMENT-INCOME> 312,993,540
<REALIZED-GAINS-CURRENT> 37,029,261
<APPREC-INCREASE-CURRENT> 187,205,403
<NET-CHANGE-FROM-OPS> 537,228,204
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,003,246)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,703,147
<NUMBER-OF-SHARES-REDEEMED> (2,737,903)
<SHARES-REINVESTED> 787,176
<NET-CHANGE-IN-ASSETS> 1,466,545,289
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (3,265,863)
<OVERDIST-NET-GAINS-PRIOR> (47,958,683)
<GROSS-ADVISORY-FEES> (24,164,691)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (34,068,543)
<AVERAGE-NET-ASSETS> 5,266,799,562
<PER-SHARE-NAV-BEGIN> 11.260
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> .480
<PER-SHARE-DIVIDEND> (.620)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.750
<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, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 687,767,242
<INVESTMENTS-AT-VALUE> 736,891,565
<RECEIVABLES> 13,511,055
<ASSETS-OTHER> 644,039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 751,046,659
<PAYABLE-FOR-SECURITIES> 9,196,059
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,810,096
<TOTAL-LIABILITIES> 12,006,155
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 690,330,797
<SHARES-COMMON-STOCK> 67,536,025
<SHARES-COMMON-PRIOR> 63,366,366
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (396,549)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (18,067)
<ACCUM-APPREC-OR-DEPREC> 49,124,323
<NET-ASSETS> 739,040,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,059,029
<OTHER-INCOME> 0
<EXPENSES-NET> (4,687,980)
<NET-INVESTMENT-INCOME> 38,371,049
<REALIZED-GAINS-CURRENT> 6,524,504
<APPREC-INCREASE-CURRENT> 15,000,707
<NET-CHANGE-FROM-OPS> 59,896,260
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,238,602)
<DISTRIBUTIONS-OF-GAINS> (9,091,610)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,004,492
<NUMBER-OF-SHARES-REDEEMED> (6,956,391)
<SHARES-REINVESTED> 2,121,558
<NET-CHANGE-IN-ASSETS> 68,766,852
<ACCUMULATED-NII-PRIOR> 373,927
<ACCUMULATED-GAINS-PRIOR> 2,801,890
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,414,301)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,687,980)
<AVERAGE-NET-ASSETS> 700,632,143
<PER-SHARE-NAV-BEGIN> 10.39
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> .32
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> (.14)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.56
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 082
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 687,767,242
<INVESTMENTS-AT-VALUE> 736,891,565
<RECEIVABLES> 13,511,055
<ASSETS-OTHER> 644,039
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 751,046,659
<PAYABLE-FOR-SECURITIES> 9,196,059
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,810,096
<TOTAL-LIABILITIES> 12,006,155
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 690,330,797
<SHARES-COMMON-STOCK> 2,442,080
<SHARES-COMMON-PRIOR> 1,144,565
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (396,549)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (18,067)
<ACCUM-APPREC-OR-DEPREC> 49,124,323
<NET-ASSETS> 739,040,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 43,059,029
<OTHER-INCOME> 0
<EXPENSES-NET> (4,687,980)
<NET-INVESTMENT-INCOME> 38,371,049
<REALIZED-GAINS-CURRENT> 6,524,504
<APPREC-INCREASE-CURRENT> 15,000,707
<NET-CHANGE-FROM-OPS> 59,896,260
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (902,923)
<DISTRIBUTIONS-OF-GAINS> (252,851)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,410,008
<NUMBER-OF-SHARES-REDEEMED> (186,019)
<SHARES-REINVESTED> 73,526
<NET-CHANGE-IN-ASSETS> 68,766,852
<ACCUMULATED-NII-PRIOR> 373,927
<ACCUMULATED-GAINS-PRIOR> 2,801,890
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,414,301)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,687,980)
<AVERAGE-NET-ASSETS> 700,632,143
<PER-SHARE-NAV-BEGIN> 10.43
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .33
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> (.14)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.61
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIREY 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 254,345,593
<INVESTMENTS-AT-VALUE> 273,332,908
<RECEIVABLES> 4,828,486
<ASSETS-OTHER> 353,608
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 278,515,002
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,060,708
<TOTAL-LIABILITIES> 1,060,708
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 257,156,870
<SHARES-COMMON-STOCK> 22,006,468
<SHARES-COMMON-PRIOR> 20,055,377
<ACCUMULATED-NII-CURRENT> 121,387
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,188,722
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,987,315
<NET-ASSETS> 277,454,294
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,644,681
<OTHER-INCOME> 0
<EXPENSES-NET> (1,893,265)
<NET-INVESTMENT-INCOME> 13,751,416
<REALIZED-GAINS-CURRENT> 3,599,269
<APPREC-INCREASE-CURRENT> 5,186,539
<NET-CHANGE-FROM-OPS> 22,537,224
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,602,062)
<DISTRIBUTIONS-OF-GAINS> (1,419,602)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,200,877
<NUMBER-OF-SHARES-REDEEMED> (2,852,691)
<SHARES-REINVESTED> 602,905
<NET-CHANGE-IN-ASSETS> 35,191,718
<ACCUMULATED-NII-PRIOR> 353,668
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (939,203)
<GROSS-ADVISORY-FEES> (1,432,605)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,893,265)
<AVERAGE-NET-ASSETS> 261,321,834
<PER-SHARE-NAV-BEGIN> 11.800
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> .390
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.070)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.110
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 254,345,593
<INVESTMENTS-AT-VALUE> 273,332,908
<RECEIVABLES> 4,828,486
<ASSETS-OTHER> 353,608
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 278,515,002
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,060,708
<TOTAL-LIABILITIES> 1,060,708
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 257,156,870
<SHARES-COMMON-STOCK> 892,230
<SHARES-COMMON-PRIOR> 477,543
<ACCUMULATED-NII-CURRENT> 121,387
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,188,722
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,987,315
<NET-ASSETS> 277,454,294
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,644,681
<OTHER-INCOME> 0
<EXPENSES-NET> (1,893,265)
<NET-INVESTMENT-INCOME> 13,751,416
<REALIZED-GAINS-CURRENT> 3,599,269
<APPREC-INCREASE-CURRENT> 5,186,539
<NET-CHANGE-FROM-OPS> 22,537,224
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (381,635)
<DISTRIBUTIONS-OF-GAINS> (51,742)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 465,522
<NUMBER-OF-SHARES-REDEEMED> (76,937)
<SHARES-REINVESTED> 26,102
<NET-CHANGE-IN-ASSETS> 35,191,718
<ACCUMULATED-NII-PRIOR> 353,668
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (939,203)
<GROSS-ADVISORY-FEES> (1,432,605)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,893,265)
<AVERAGE-NET-ASSETS> 261,321,834
<PER-SHARE-NAV-BEGIN> 11.840
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> .400
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> (.070)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.170
<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, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 28
<NAME> FRANKLIN MICHIGAN TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 8,702,208
<INVESTMENTS-AT-VALUE> 9,196,077
<RECEIVABLES> 208,678
<ASSETS-OTHER> 128,844
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,533,599
<PAYABLE-FOR-SECURITIES> 248,594
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,413
<TOTAL-LIABILITIES> 266,007
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,708,828
<SHARES-COMMON-STOCK> 841,149
<SHARES-COMMON-PRIOR> 372,799
<ACCUMULATED-NII-CURRENT> 43,531
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,364
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 493,869
<NET-ASSETS> 9,267,592
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 385,838
<OTHER-INCOME> 0
<EXPENSES-NET> (17,067)
<NET-INVESTMENT-INCOME> 368,771
<REALIZED-GAINS-CURRENT> 21,364
<APPREC-INCREASE-CURRENT> 425,437
<NET-CHANGE-FROM-OPS> 815,572
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (370,383)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 551,576
<NUMBER-OF-SHARES-REDEEMED> (106,557)
<SHARES-REINVESTED> 23,331
<NET-CHANGE-IN-ASSETS> 5,383,462
<ACCUMULATED-NII-PRIOR> 38,055
<ACCUMULATED-GAINS-PRIOR> 3,604
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (44,302)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (69,400)
<AVERAGE-NET-ASSETS> 6,841,676
<PER-SHARE-NAV-BEGIN> 10.42
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .67
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> .00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.02
<EXPENSE-RATIO> .25<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .00
<FN>
<F1>RATIO OF EXPENSES EXCLUDING WAIVER AND PAYMENTS BY AFFILIATE
AMOUNTED TO 1.01%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 147,039,668
<INVESTMENTS-AT-VALUE> 156,923,877
<RECEIVABLES> 2,358,778
<ASSETS-OTHER> 76,837
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,359,492
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 610,531
<TOTAL-LIABILITIES> 610,531
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,675,374
<SHARES-COMMON-STOCK> 12,343,294
<SHARES-COMMON-PRIOR> 11,792,161
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (14,581)
<ACCUMULATED-NET-GAINS> 203,959
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,884,209
<NET-ASSETS> 158,748,961
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,995,452
<OTHER-INCOME> 0
<EXPENSES-NET> (1,165,779)
<NET-INVESTMENT-INCOME> 7,829,673
<REALIZED-GAINS-CURRENT> 1,121,637
<APPREC-INCREASE-CURRENT> 2,137,360
<NET-CHANGE-FROM-OPS> 11,088,670
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,588,746)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,933,459
<NUMBER-OF-SHARES-REDEEMED> (1,703,156)
<SHARES-REINVESTED> 320,830
<NET-CHANGE-IN-ASSETS> 14,361,610
<ACCUMULATED-NII-PRIOR> 29,370
<ACCUMULATED-GAINS-PRIOR> (917,678)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (872,451)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,165,779)
<AVERAGE-NET-ASSETS> 149,098,251
<PER-SHARE-NAV-BEGIN> 11.860
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> .270
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.12
<EXPENSE-RATIO> .760
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 147,039,668
<INVESTMENTS-AT-VALUE> 156,923,877
<RECEIVABLES> 2,358,778
<ASSETS-OTHER> 76,837
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,359,492
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 610,531
<TOTAL-LIABILITIES> 610,531
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,675,374
<SHARES-COMMON-STOCK> 747,179
<SHARES-COMMON-PRIOR> 376,236
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (14,581)
<ACCUMULATED-NET-GAINS> 203,959
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,884,209
<NET-ASSETS> 158,748,961
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,995,452
<OTHER-INCOME> 0
<EXPENSES-NET> (1,165,779)
<NET-INVESTMENT-INCOME> 7,829,673
<REALIZED-GAINS-CURRENT> 1,121,637
<APPREC-INCREASE-CURRENT> 2,137,360
<NET-CHANGE-FROM-OPS> 11,088,670
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (284,878)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 460,913
<NUMBER-OF-SHARES-REDEEMED> (105,355)
<SHARES-REINVESTED> 15,385
<NET-CHANGE-IN-ASSETS> 14,361,610
<ACCUMULATED-NII-PRIOR> 29,370
<ACCUMULATED-GAINS-PRIOR> (917,678)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (872,451)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,165,779)
<AVERAGE-NET-ASSETS> 149,098,257
<PER-SHARE-NAV-BEGIN> 11.92
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> .270
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.190
<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, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 111
<NAME> FRANKLIN MISSOURI TAX FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 303,607,634
<INVESTMENTS-AT-VALUE> 325,809,661
<RECEIVABLES> 6,898,933
<ASSETS-OTHER> 1,181,802
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 333,890,396
<PAYABLE-FOR-SECURITIES> 14,721,648
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,079,192
<TOTAL-LIABILITIES> 15,800,840
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 294,540,002
<SHARES-COMMON-STOCK> 25,192,819
<SHARES-COMMON-PRIOR> 22,789,317
<ACCUMULATED-NII-CURRENT> 487,303
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 860,224
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,202,027
<NET-ASSETS> 318,089,556
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,619,520
<OTHER-INCOME> 0
<EXPENSES-NET> (2,112,096)
<NET-INVESTMENT-INCOME> 15,507,424
<REALIZED-GAINS-CURRENT> 1,728,020
<APPREC-INCREASE-CURRENT> 9,244,449
<NET-CHANGE-FROM-OPS> 26,479,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,241,932)
<DISTRIBUTIONS-OF-GAINS> (1,036,132)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,811,731
<NUMBER-OF-SHARES-REDEEMED> (3,060,282)
<SHARES-REINVESTED> 652,053
<NET-CHANGE-IN-ASSETS> 44,230,226
<ACCUMULATED-NII-PRIOR> 548,705
<ACCUMULATED-GAINS-PRIOR> 196,677
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,574,188)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,112,096)
<AVERAGE-NET-ASSETS> 292,147,960
<PER-SHARE-NAV-BEGIN> 11.830
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .440
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.040)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.230
<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, 1998 ANNUAL REPORT AND ITS 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 303,607,634
<INVESTMENTS-AT-VALUE> 325,809,661
<RECEIVABLES> 6,898,933
<ASSETS-OTHER> 1,181,802
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 333,890,396
<PAYABLE-FOR-SECURITIES> 14,721,648
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,079,192
<TOTAL-LIABILITIES> 15,800,840
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 294,540,002
<SHARES-COMMON-STOCK> 818,701
<SHARES-COMMON-PRIOR> 362,419
<ACCUMULATED-NII-CURRENT> 487,303
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 860,224
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,202,027
<NET-ASSETS> 318,089,556
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,619,520
<OTHER-INCOME> 0
<EXPENSES-NET> (2,112,096)
<NET-INVESTMENT-INCOME> 15,507,424
<REALIZED-GAINS-CURRENT> 1,728,020
<APPREC-INCREASE-CURRENT> 9,244,449
<NET-CHANGE-FROM-OPS> 26,479,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (326,894)
<DISTRIBUTIONS-OF-GAINS> (28,341)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 497,123
<NUMBER-OF-SHARES-REDEEMED> (61,062)
<SHARES-REINVESTED> 20,221
<NET-CHANGE-IN-ASSETS> 44,230,226
<ACCUMULATED-NII-PRIOR> 548,705
<ACCUMULATED-GAINS-PRIOR> 196,677
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,574,188)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,112,096)
<AVERAGE-NET-ASSETS> 292,147,960
<PER-SHARE-NAV-BEGIN> 11.850
<PER-SHARE-NII> .580
<PER-SHARE-GAIN-APPREC> .450
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> (.040)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.270
<EXPENSE-RATIO> 1.270
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 431,295,544
<INVESTMENTS-AT-VALUE> 460,625,006
<RECEIVABLES> 9,404,308
<ASSETS-OTHER> 2,295,155
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 472,324,469
<PAYABLE-FOR-SECURITIES> 28,091,288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,264,536
<TOTAL-LIABILITIES> 29,355,824
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 413,968,727
<SHARES-COMMON-STOCK> 36,020,329
<SHARES-COMMON-PRIOR> 33,251,901
<ACCUMULATED-NII-CURRENT> 1,451,796
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,781,340)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,329,462
<NET-ASSETS> 442,968,645
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 24,806,305
<OTHER-INCOME> 0
<EXPENSES-NET> (2,821,631)
<NET-INVESTMENT-INCOME> 21,984,674
<REALIZED-GAINS-CURRENT> 3,490,454
<APPREC-INCREASE-CURRENT> 7,488,709
<NET-CHANGE-FROM-OPS> 32,963,837
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21,486,828)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,268,610
<NUMBER-OF-SHARES-REDEEMED> (3,535,934)
<SHARES-REINVESTED> 1,035,752
<NET-CHANGE-IN-ASSETS> 51,865,908
<ACCUMULATED-NII-PRIOR> 1,470,171
<ACCUMULATED-GAINS-PRIOR> (5,271,794)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,119,137
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,821,631
<AVERAGE-NET-ASSETS> 413,477,104
<PER-SHARE-NAV-BEGIN> 11.550
<PER-SHARE-NII> 0.620
<PER-SHARE-GAIN-APPREC> 0.310
<PER-SHARE-DIVIDEND> (0.620)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.860
<EXPENSE-RATIO> 0.670
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 431,295,544
<INVESTMENTS-AT-VALUE> 460,625,006
<RECEIVABLES> 9,404,308
<ASSETS-OTHER> 2,295,155
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 472,324,469
<PAYABLE-FOR-SECURITIES> 28,091,288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,264,536
<TOTAL-LIABILITIES> 29,355,824
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 413,968,727
<SHARES-COMMON-STOCK> 1,337,390
<SHARES-COMMON-PRIOR> 611,702
<ACCUMULATED-NII-CURRENT> 1,451,796
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,781,340)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29,329,462
<NET-ASSETS> 442,968,645
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 24,806,305
<OTHER-INCOME> 0
<EXPENSES-NET> (2,821,631)
<NET-INVESTMENT-INCOME> 21,984,674
<REALIZED-GAINS-CURRENT> 3,490,454
<APPREC-INCREASE-CURRENT> 7,488,709
<NET-CHANGE-FROM-OPS> 32,963,837
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (516,221)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 784,427
<NUMBER-OF-SHARES-REDEEMED> (90,512)
<SHARES-REINVESTED> 31,773
<NET-CHANGE-IN-ASSETS> 51,865,908
<ACCUMULATED-NII-PRIOR> 1,470,171
<ACCUMULATED-GAINS-PRIOR> (5,271,794)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,119,137
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,821,631
<AVERAGE-NET-ASSETS> 413,477,104
<PER-SHARE-NAV-BEGIN> 11.610
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.310
<PER-SHARE-DIVIDEND> (0.560)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.920
<EXPENSE-RATIO> 1.220
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 126,807,194
<INVESTMENTS-AT-VALUE> 135,881,803
<RECEIVABLES> 1,944,305
<ASSETS-OTHER> 236,289
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,062,397
<PAYABLE-FOR-SECURITIES> 4,940,763
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 468,365
<TOTAL-LIABILITIES> 5,409,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,013,277
<SHARES-COMMON-STOCK> 11,183,221
<SHARES-COMMON-PRIOR> 11,131,224
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (123,363)
<ACCUMULATED-NET-GAINS> 1,688,796
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,074,609
<NET-ASSETS> 132,653,269
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,998,233
<OTHER-INCOME> 0
<EXPENSES-NET> (994,723)
<NET-INVESTMENT-INCOME> 7,003,510
<REALIZED-GAINS-CURRENT> 1,689,323
<APPREC-INCREASE-CURRENT> 2,206,546
<NET-CHANGE-FROM-OPS> 10,899,379
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,118,581)
<DISTRIBUTIONS-OF-GAINS> (344,573)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,263,835
<NUMBER-OF-SHARES-REDEEMED> (1,490,778)
<SHARES-REINVESTED> 278,940
<NET-CHANGE-IN-ASSETS> 5,301,261
<ACCUMULATED-NII-PRIOR> 51,160
<ACCUMULATED-GAINS-PRIOR> 347,091
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (770,725)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (994,723)
<AVERAGE-NET-ASSETS> 129,007,873
<PER-SHARE-NAV-BEGIN> 11.370
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .360
<PER-SHARE-DIVIDEND> (.64)
<PER-SHARE-DISTRIBUTIONS> (.030)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.680
<EXPENSE-RATIO> .760
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 126,807,194
<INVESTMENTS-AT-VALUE> 135,881,803
<RECEIVABLES> 1,944,305
<ASSETS-OTHER> 236,289
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,062,397
<PAYABLE-FOR-SECURITIES> 4,940,763
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 468,365
<TOTAL-LIABILITIES> 5,409,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122,013,277
<SHARES-COMMON-STOCK> 175,794
<SHARES-COMMON-PRIOR> 64,374
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (123,363)
<ACCUMULATED-NET-GAINS> 1,688,796
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,074,609
<NET-ASSETS> 132,653,269
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,998,233
<OTHER-INCOME> 0
<EXPENSES-NET> (994,723)
<NET-INVESTMENT-INCOME> 7,003,510
<REALIZED-GAINS-CURRENT> 1,689,323
<APPREC-INCREASE-CURRENT> 2,206,546
<NET-CHANGE-FROM-OPS> 10,899,379
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (60,260)
<DISTRIBUTIONS-OF-GAINS> (3,045)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125,740
<NUMBER-OF-SHARES-REDEEMED> (18,321)
<SHARES-REINVESTED> 4,001
<NET-CHANGE-IN-ASSETS> 5,301,261
<ACCUMULATED-NII-PRIOR> 51,160
<ACCUMULATED-GAINS-PRIOR> 347,091
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (770,725)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (994,723)
<AVERAGE-NET-ASSETS> 129,007,873
<PER-SHARE-NAV-BEGIN> 11.490
<PER-SHARE-NII> .580
<PER-SHARE-GAIN-APPREC> .350
<PER-SHARE-DIVIDEND> (.580)
<PER-SHARE-DISTRIBUTIONS> (.030)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.81
<EXPENSE-RATIO> 1.330
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 325,801,677
<INVESTMENTS-AT-VALUE> 347,670,937
<RECEIVABLES> 6,009,930
<ASSETS-OTHER> 659,185
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 354,340,052
<PAYABLE-FOR-SECURITIES> 7,800,433
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,154,141
<TOTAL-LIABILITIES> 8,954,574
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 322,773,571
<SHARES-COMMON-STOCK> 27,973,723
<SHARES-COMMON-PRIOR> 24,653,916
<ACCUMULATED-NII-CURRENT> 194,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 548,232
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,869,260
<NET-ASSETS> 345,385,478
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,021,886
<OTHER-INCOME> 0
<EXPENSES-NET> (2,261,391)
<NET-INVESTMENT-INCOME> 16,760,495
<REALIZED-GAINS-CURRENT> 2,402,402
<APPREC-INCREASE-CURRENT> 6,947,724
<NET-CHANGE-FROM-OPS> 26,110,621
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,626,624)
<DISTRIBUTIONS-OF-GAINS> (2,622,841)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,205,834
<NUMBER-OF-SHARES-REDEEMED> (2,681,610)
<SHARES-REINVESTED> 795,583
<NET-CHANGE-IN-ASSETS> 51,539,540
<ACCUMULATED-NII-PRIOR> 533,631
<ACCUMULATED-GAINS-PRIOR> 856,652
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,689,780)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,261,391)
<AVERAGE-NET-ASSETS> 317,925,569
<PER-SHARE-NAV-BEGIN> 11.650
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .350
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.880
<EXPENSE-RATIO> .690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 325,801,677
<INVESTMENTS-AT-VALUE> 347,670,937
<RECEIVABLES> 6,009,930
<ASSETS-OTHER> 659,185
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 354,340,052
<PAYABLE-FOR-SECURITIES> 7,800,433
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,154,141
<TOTAL-LIABILITIES> 8,954,574
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 322,773,571
<SHARES-COMMON-STOCK> 1,103,630
<SHARES-COMMON-PRIOR> 569,870
<ACCUMULATED-NII-CURRENT> 194,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 548,232
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,869,260
<NET-ASSETS> 345,385,478
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,021,886
<OTHER-INCOME> 0
<EXPENSES-NET> (2,261,391)
<NET-INVESTMENT-INCOME> 16,760,495
<REALIZED-GAINS-CURRENT> 2,402,402
<APPREC-INCREASE-CURRENT> 6,947,724
<NET-CHANGE-FROM-OPS> 26,110,621
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (473,087)
<DISTRIBUTIONS-OF-GAINS> (87,981)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 626,031
<NUMBER-OF-SHARES-REDEEMED> (120,298)
<SHARES-REINVESTED> 28,027
<NET-CHANGE-IN-ASSETS> 51,539,540
<ACCUMULATED-NII-PRIOR> 533,631
<ACCUMULATED-GAINS-PRIOR> 856,652
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,689,780)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,261,391)
<AVERAGE-NET-ASSETS> 317,925,569
<PER-SHARE-NAV-BEGIN> 11.710
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> .340
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.950
<EXPENSE-RATIO> 1.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 207,787,674
<INVESTMENTS-AT-VALUE> 223,153,265
<RECEIVABLES> 3,893,830
<ASSETS-OTHER> 314,558
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227,361,653
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910,128
<TOTAL-LIABILITIES> 910,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 210,750,204
<SHARES-COMMON-STOCK> 18,110,125
<SHARES-COMMON-PRIOR> 16,495,571
<ACCUMULATED-NII-CURRENT> 28,029
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 307,701
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,365,591
<NET-ASSETS> 226,451,525
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,946,566
<OTHER-INCOME> 0
<EXPENSES-NET> (1,563,547)
<NET-INVESTMENT-INCOME> 11,383,019
<REALIZED-GAINS-CURRENT> 1,367,201
<APPREC-INCREASE-CURRENT> 5,167,385
<NET-CHANGE-FROM-OPS> 17,917,605
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,265,935)
<DISTRIBUTIONS-OF-GAINS> (1,673,585)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,766,059
<NUMBER-OF-SHARES-REDEEMED> (1,626,797)
<SHARES-REINVESTED> 475,292
<NET-CHANGE-IN-ASSETS> 27,303,188
<ACCUMULATED-NII-PRIOR> 278,329
<ACCUMULATED-GAINS-PRIOR> 677,276
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,189,527)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,563,547)
<AVERAGE-NET-ASSETS> 211,840,321
<PER-SHARE-NAV-BEGIN> 11.730
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .360
<PER-SHARE-DIVIDEND> (.650)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.980
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 207,787,674
<INVESTMENTS-AT-VALUE> 223,153,265
<RECEIVABLES> 3,893,830
<ASSETS-OTHER> 314,558
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227,361,653
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910,128
<TOTAL-LIABILITIES> 910,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 210,750,204
<SHARES-COMMON-STOCK> 786,748
<SHARES-COMMON-PRIOR> 482,597
<ACCUMULATED-NII-CURRENT> 28,029
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 307,701
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,365,591
<NET-ASSETS> 226,451,525
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,946,566
<OTHER-INCOME> 0
<EXPENSES-NET> (1,563,547)
<NET-INVESTMENT-INCOME> 11,383,019
<REALIZED-GAINS-CURRENT> 1,367,201
<APPREC-INCREASE-CURRENT> 5,167,385
<NET-CHANGE-FROM-OPS> 17,917,605
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (367,384)
<DISTRIBUTIONS-OF-GAINS> (63,191)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 390,828
<NUMBER-OF-SHARES-REDEEMED> (104,751)
<SHARES-REINVESTED> 18,074
<NET-CHANGE-IN-ASSETS> 27,303,188
<ACCUMULATED-NII-PRIOR> 278,329
<ACCUMULATED-GAINS-PRIOR> 677,276
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,189,527)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,563,547)
<AVERAGE-NET-ASSETS> 211,840,321
<PER-SHARE-NAV-BEGIN> 11.780
<PER-SHARE-NII> .580
<PER-SHARE-GAIN-APPREC> .360
<PER-SHARE-DIVIDEND> (.580)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.040
<EXPENSE-RATIO> 1.290
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,563,617,763
<INVESTMENTS-AT-VALUE> 1,684,102,808
<RECEIVABLES> 34,187,651
<ASSETS-OTHER> 481,309
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,718,771,768
<PAYABLE-FOR-SECURITIES> 6,825,623
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,850,667
<TOTAL-LIABILITIES> 12,676,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,587,710,289
<SHARES-COMMON-STOCK> 139,068,974
<SHARES-COMMON-PRIOR> 125,815,973
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,372,701)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (727,155)
<ACCUM-APPREC-OR-DEPREC> 120,485,045
<NET-ASSETS> 1,706,095,478
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 96,021,683
<OTHER-INCOME> 0
<EXPENSES-NET> (9,906,526)
<NET-INVESTMENT-INCOME> 86,115,157
<REALIZED-GAINS-CURRENT> 3,659,832
<APPREC-INCREASE-CURRENT> 37,696,255
<NET-CHANGE-FROM-OPS> 127,471,244
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (87,160,434)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30,212,848
<NUMBER-OF-SHARES-REDEEMED> (18,970,452)
<SHARES-REINVESTED> 2,010,605
<NET-CHANGE-IN-ASSETS> 224,452,839
<ACCUMULATED-NII-PRIOR> 1,660,453
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,386,987)
<GROSS-ADVISORY-FEES> (7,419,693)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (9,906,526)
<AVERAGE-NET-ASSETS> 1,584,577,869
<PER-SHARE-NAV-BEGIN> 11.590
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .300
<PER-SHARE-DIVIDEND> (.660)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.870
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1,563,617,763
<INVESTMENTS-AT-VALUE> 1,684,102,808
<RECEIVABLES> 34,187,651
<ASSETS-OTHER> 481,309
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,718,771,768
<PAYABLE-FOR-SECURITIES> 6,825,623
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,850,667
<TOTAL-LIABILITIES> 12,676,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,587,710,289
<SHARES-COMMON-STOCK> 4,685,874
<SHARES-COMMON-PRIOR> 2,018,521
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1,372,701)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (727,155)
<ACCUM-APPREC-OR-DEPREC> 120,485,045
<NET-ASSETS> 1,706,095,478
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 96,021,683
<OTHER-INCOME> 0
<EXPENSES-NET> (9,906,526)
<NET-INVESTMENT-INCOME> 86,115,157
<REALIZED-GAINS-CURRENT> 3,659,832
<APPREC-INCREASE-CURRENT> 37,696,255
<NET-CHANGE-FROM-OPS> 127,471,244
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,987,877)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,083,120
<NUMBER-OF-SHARES-REDEEMED> (508,837)
<SHARES-REINVESTED> 93,070
<NET-CHANGE-IN-ASSETS> 224,452,839
<ACCUMULATED-NII-PRIOR> 1,660,453
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (4,386,987)
<GROSS-ADVISORY-FEES> (7,419,693)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (9,906,526)
<AVERAGE-NET-ASSETS> 1,584,577,869
<PER-SHARE-NAV-BEGIN> 11.670
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> .290
<PER-SHARE-DIVIDEND> (.600)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.960
<EXPENSE-RATIO> 1.170
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 50,217,152
<INVESTMENTS-AT-VALUE> 54,043,777
<RECEIVABLES> 657,671
<ASSETS-OTHER> 118,667
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 54,820,115
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,886
<TOTAL-LIABILITIES> 176,886
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,660,780
<SHARES-COMMON-STOCK> 4,526,785
<SHARES-COMMON-PRIOR> 4,344,574
<ACCUMULATED-NII-CURRENT> 95,452
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 60,372
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,826,625
<NET-ASSETS> 54,643,229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,308,465
<OTHER-INCOME> 0
<EXPENSES-NET> (432,979)
<NET-INVESTMENT-INCOME> 2,875,486
<REALIZED-GAINS-CURRENT> 578,277
<APPREC-INCREASE-CURRENT> 886,955
<NET-CHANGE-FROM-OPS> 4,340,718
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,896,065)
<DISTRIBUTIONS-OF-GAINS> (97,364)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 579,644
<NUMBER-OF-SHARES-REDEEMED> (531,972)
<SHARES-REINVESTED> 134,539
<NET-CHANGE-IN-ASSETS> 2,158,623
<ACCUMULATED-NII-PRIOR> 116,031
<ACCUMULATED-GAINS-PRIOR> (420,541)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 330,541
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 432,979
<AVERAGE-NET-ASSETS> 52,752,283
<PER-SHARE-NAV-BEGIN> 11.770
<PER-SHARE-NII> 0.650
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> (0.650)
<PER-SHARE-DISTRIBUTIONS> (0.020)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.070
<EXPENSE-RATIO> .820
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 129,681,075
<INVESTMENTS-AT-VALUE> 138,954,233
<RECEIVABLES> 2,820,631
<ASSETS-OTHER> 66,243
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141,841,107
<PAYABLE-FOR-SECURITIES> 1,932,696
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 517,828
<TOTAL-LIABILITIES> 2,450,524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 131,396,273
<SHARES-COMMON-STOCK> 11,618,476
<SHARES-COMMON-PRIOR> 9,984,603
<ACCUMULATED-NII-CURRENT> 175,633
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,454,481)
<ACCUM-APPREC-OR-DEPREC> 9,273,158
<NET-ASSETS> 139,390,583
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,874,134
<OTHER-INCOME> 0
<EXPENSES-NET> (975,268)
<NET-INVESTMENT-INCOME> 6,898,866
<REALIZED-GAINS-CURRENT> 999,780
<APPREC-INCREASE-CURRENT> 2,382,871
<NET-CHANGE-FROM-OPS> 10,281,517
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,832,628)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,544,019
<NUMBER-OF-SHARES-REDEEMED> (1,168,965)
<SHARES-REINVESTED> 258,819
<NET-CHANGE-IN-ASSETS> 23,405,309
<ACCUMULATED-NII-PRIOR> 294,774
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (2,454,261)
<GROSS-ADVISORY-FEES> (758,170)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (975,268)
<AVERAGE-NET-ASSETS> 125,815,848
<PER-SHARE-NAV-BEGIN> 11.320
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.300
<PER-SHARE-DIVIDEND> (0.640)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.610
<EXPENSE-RATIO> 0.760
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 129,681,075
<INVESTMENTS-AT-VALUE> 138,954,233
<RECEIVABLES> 2,820,631
<ASSETS-OTHER> 66,243
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141,841,107
<PAYABLE-FOR-SECURITIES> 1,932,696
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 517,828
<TOTAL-LIABILITIES> 2,450,524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 131,396,273
<SHARES-COMMON-STOCK> 382,710
<SHARES-COMMON-PRIOR> 264,131
<ACCUMULATED-NII-CURRENT> 175,633
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,454,481)
<ACCUM-APPREC-OR-DEPREC> 9,273,158
<NET-ASSETS> 139,390,583
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,874,134
<OTHER-INCOME> 0
<EXPENSES-NET> (975,268)
<NET-INVESTMENT-INCOME> 6,898,866
<REALIZED-GAINS-CURRENT> 999,780
<APPREC-INCREASE-CURRENT> 2,382,871
<NET-CHANGE-FROM-OPS> 10,281,517
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (185,379)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 169,745
<NUMBER-OF-SHARES-REDEEMED> (61,812)
<SHARES-REINVESTED> 10,646
<NET-CHANGE-IN-ASSETS> 23,405,309
<ACCUMULATED-NII-PRIOR> 294,774
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (2,454,261)
<GROSS-ADVISORY-FEES> (758,170)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (975,268)
<AVERAGE-NET-ASSETS> 125,815,848
<PER-SHARE-NAV-BEGIN> 11.370
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> (0.580)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.680
<EXPENSE-RATIO> 1.320
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 297,165,173
<INVESTMENTS-AT-VALUE> 317,702,514
<RECEIVABLES> 5,900,473
<ASSETS-OTHER> 124,934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323,727,921
<PAYABLE-FOR-SECURITIES> 4,144,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,134,490
<TOTAL-LIABILITIES> 6,278,989
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 298,134,475
<SHARES-COMMON-STOCK> 24,552,795
<SHARES-COMMON-PRIOR> 22,245,981
<ACCUMULATED-NII-CURRENT> 156,799
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,379,683)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,537,341
<NET-ASSETS> 317,448,932
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,283,954
<OTHER-INCOME> 0
<EXPENSES-NET> (2,122,118)
<NET-INVESTMENT-INCOME> 15,161,836
<REALIZED-GAINS-CURRENT> 1,738,033
<APPREC-INCREASE-CURRENT> 7,658,995
<NET-CHANGE-FROM-OPS> 24,558,864
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,484,337)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,574,465
<NUMBER-OF-SHARES-REDEEMED> (2,864,958)
<SHARES-REINVESTED> 597,307
<NET-CHANGE-IN-ASSETS> 46,863,455
<ACCUMULATED-NII-PRIOR> 137,710
<ACCUMULATED-GAINS-PRIOR> (3,117,716)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,566,067)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,122,118)
<AVERAGE-NET-ASSETS> 290,753,965
<PER-SHARE-NAV-BEGIN> 11.730
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .380
<PER-SHARE-DIVIDEND> (.620)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.110
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 297,165,173
<INVESTMENTS-AT-VALUE> 317,702,514
<RECEIVABLES> 5,900,473
<ASSETS-OTHER> 124,934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323,727,921
<PAYABLE-FOR-SECURITIES> 4,144,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,134,490
<TOTAL-LIABILITIES> 6,278,989
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 298,134,475
<SHARES-COMMON-STOCK> 1,645,295
<SHARES-COMMON-PRIOR> 814,708
<ACCUMULATED-NII-CURRENT> 156,799
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,379,683)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,537,341
<NET-ASSETS> 317,448,932
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,283,954
<OTHER-INCOME> 0
<EXPENSES-NET> (2,122,118)
<NET-INVESTMENT-INCOME> 15,161,836
<REALIZED-GAINS-CURRENT> 1,738,033
<APPREC-INCREASE-CURRENT> 7,658,995
<NET-CHANGE-FROM-OPS> 24,558,864
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (658,410)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 917,204
<NUMBER-OF-SHARES-REDEEMED> (120,346)
<SHARES-REINVESTED> 33,729
<NET-CHANGE-IN-ASSETS> 46,863,455
<ACCUMULATED-NII-PRIOR> 137,710
<ACCUMULATED-GAINS-PRIOR> (3,117,716)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,566,067)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,122,118)
<AVERAGE-NET-ASSETS> 290,753,965
<PER-SHARE-NAV-BEGIN> 11.790
<PER-SHARE-NII> .560
<PER-SHARE-GAIN-APPREC> .390
<PER-SHARE-DIVIDEND> (.560)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.180
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 768,637,732
<INVESTMENTS-AT-VALUE> 823,128,828
<RECEIVABLES> 10,678,070
<ASSETS-OTHER> 489,855
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 834,296,753
<PAYABLE-FOR-SECURITIES> 6,731,601
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,778,275
<TOTAL-LIABILITIES> 9,509,876
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,335,648
<SHARES-COMMON-STOCK> 70,818,846
<SHARES-COMMON-PRIOR> 66,912,442
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (599,453)
<ACCUMULATED-NET-GAINS> 2,559,586
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,491,096
<NET-ASSETS> 824,786,877
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,348,723
<OTHER-INCOME> 0
<EXPENSES-NET> (4,979,668)
<NET-INVESTMENT-INCOME> 42,369,055
<REALIZED-GAINS-CURRENT> 7,063,992
<APPREC-INCREASE-CURRENT> 12,652,846
<NET-CHANGE-FROM-OPS> 62,085,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42,690,791)
<DISTRIBUTIONS-OF-GAINS> (5,215,511)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,989,623
<NUMBER-OF-SHARES-REDEEMED> (8,792,791)
<SHARES-REINVESTED> 1,709,572
<NET-CHANGE-IN-ASSETS> 66,966,335
<ACCUMULATED-NII-PRIOR> 163,313
<ACCUMULATED-GAINS-PRIOR> 781,030
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,799,811)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,979,668)
<AVERAGE-NET-ASSETS> 785,189,169
<PER-SHARE-NAV-BEGIN> 11.240
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> .290
<PER-SHARE-DIVIDEND> (.620)
<PER-SHARE-DISTRIBUTIONS> (.080)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.440
<EXPENSE-RATIO> .630
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 768,637,732
<INVESTMENTS-AT-VALUE> 823,128,828
<RECEIVABLES> 10,678,070
<ASSETS-OTHER> 489,855
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 834,296,753
<PAYABLE-FOR-SECURITIES> 6,731,601
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,778,275
<TOTAL-LIABILITIES> 9,509,876
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,335,648
<SHARES-COMMON-STOCK> 1,263,353
<SHARES-COMMON-PRIOR> 485,678
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (599,453)
<ACCUMULATED-NET-GAINS> 2,559,586
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 54,491,096
<NET-ASSETS> 824,786,877
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,348,723
<OTHER-INCOME> 0
<EXPENSES-NET> (4,979,668)
<NET-INVESTMENT-INCOME> 42,369,055
<REALIZED-GAINS-CURRENT> 7,063,992
<APPREC-INCREASE-CURRENT> 12,652,846
<NET-CHANGE-FROM-OPS> 62,085,893
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (441,030)
<DISTRIBUTIONS-OF-GAINS> (69,925)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 944,093
<NUMBER-OF-SHARES-REDEEMED> (196,079)
<SHARES-REINVESTED> 29,661
<NET-CHANGE-IN-ASSETS> 66,966,335
<ACCUMULATED-NII-PRIOR> 163,313
<ACCUMULATED-GAINS-PRIOR> 781,030
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,799,811)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,979,668)
<AVERAGE-NET-ASSETS> 785,189,169
<PER-SHARE-NAV-BEGIN> 11.300
<PER-SHARE-NII> .560
<PER-SHARE-GAIN-APPREC> .290
<PER-SHARE-DIVIDEND> (.560)
<PER-SHARE-DISTRIBUTIONS> (.080)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.510
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 614,251,934
<INVESTMENTS-AT-VALUE> 658,319,244
<RECEIVABLES> 19,055,924
<ASSETS-OTHER> 2,081,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 679,456,601
<PAYABLE-FOR-SECURITIES> 12,324,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,064,701
<TOTAL-LIABILITIES> 14,388,853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 620,743,711
<SHARES-COMMON-STOCK> 53,422,807
<SHARES-COMMON-PRIOR> 49,487,969
<ACCUMULATED-NII-CURRENT> 652,607
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (395,880)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,067,310
<NET-ASSETS> 665,067,748
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 37,464,185
<OTHER-INCOME> 0
<EXPENSES-NET> (4,219,941)
<NET-INVESTMENT-INCOME> 33,244,244
<REALIZED-GAINS-CURRENT> 2,902,623
<APPREC-INCREASE-CURRENT> 14,172,961
<NET-CHANGE-FROM-OPS> 50,319,828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (32,627,862)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,712,865
<NUMBER-OF-SHARES-REDEEMED> (6,187,043)
<SHARES-REINVESTED> 1,409,016
<NET-CHANGE-IN-ASSETS> 77,281,283
<ACCUMULATED-NII-PRIOR> 1,032,211
<ACCUMULATED-GAINS-PRIOR> (3,298,503)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,074,915
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,219,941
<AVERAGE-NET-ASSETS> 624,673,751
<PER-SHARE-NAV-BEGIN> 11.610
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> (0.640)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.920
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 614,251,934
<INVESTMENTS-AT-VALUE> 658,319,244
<RECEIVABLES> 19,055,924
<ASSETS-OTHER> 2,081,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 679,456,601
<PAYABLE-FOR-SECURITIES> 12,324,152
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,064,701
<TOTAL-LIABILITIES> 14,388,853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 620,743,711
<SHARES-COMMON-STOCK> 2,349,198
<SHARES-COMMON-PRIOR> 1,123,282
<ACCUMULATED-NII-CURRENT> 652,607
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (395,880)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,067,310
<NET-ASSETS> 665,067,748
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 37,464,185
<OTHER-INCOME> 0
<EXPENSES-NET> (4,219,941)
<NET-INVESTMENT-INCOME> 33,244,244
<REALIZED-GAINS-CURRENT> 2,902,623
<APPREC-INCREASE-CURRENT> 14,172,961
<NET-CHANGE-FROM-OPS> 50,319,828
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (995,986)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,400,159
<NUMBER-OF-SHARES-REDEEMED> (232,294)
<SHARES-REINVESTED> 58,051
<NET-CHANGE-IN-ASSETS> 77,281,283
<ACCUMULATED-NII-PRIOR> 1,032,211
<ACCUMULATED-GAINS-PRIOR> (3,298,503)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,074,915
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,219,941
<AVERAGE-NET-ASSETS> 624,673,751
<PER-SHARE-NAV-BEGIN> 11.660
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> 0.330
<PER-SHARE-DIVIDEND> (0.570)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.980
<EXPENSE-RATIO> 1.210
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 195,295,454
<INVESTMENTS-AT-VALUE> 210,340,326
<RECEIVABLES> 3,251,814
<ASSETS-OTHER> 677,050
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 214,269,190
<PAYABLE-FOR-SECURITIES> 1,231,285
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 758,771
<TOTAL-LIABILITIES> 1,990,056
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 201,517,724
<SHARES-COMMON-STOCK> 18,135,881
<SHARES-COMMON-PRIOR> 16,811,298
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (93,984)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,189,478)
<ACCUM-APPREC-OR-DEPREC> 15,044,872
<NET-ASSETS> 212,279,134
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,246,370
<OTHER-INCOME> 0
<EXPENSES-NET> (1,495,046)
<NET-INVESTMENT-INCOME> 10,751,324
<REALIZED-GAINS-CURRENT> 2,330,741
<APPREC-INCREASE-CURRENT> 3,355,147
<NET-CHANGE-FROM-OPS> 16,437,212
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,568,978)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,158,359
<NUMBER-OF-SHARES-REDEEMED> (2,268,367)
<SHARES-REINVESTED> 434,591
<NET-CHANGE-IN-ASSETS> 24,481,638
<ACCUMULATED-NII-PRIOR> 19,798
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (6,520,219)
<GROSS-ADVISORY-FEES> (1,126,660)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,495,046)
<AVERAGE-NET-ASSETS> 193,206,424
<PER-SHARE-NAV-BEGIN> 10.920
<PER-SHARE-NII> 0.600
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> (0.610)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.230
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 195,295,454
<INVESTMENTS-AT-VALUE> 210,340,326
<RECEIVABLES> 3,251,814
<ASSETS-OTHER> 677,050
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 214,269,190
<PAYABLE-FOR-SECURITIES> 1,231,285
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 758,771
<TOTAL-LIABILITIES> 1,990,056
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 201,517,724
<SHARES-COMMON-STOCK> 767,289
<SHARES-COMMON-PRIOR> 379,133
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (93,984)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4,189,478)
<ACCUM-APPREC-OR-DEPREC> 15,044,872
<NET-ASSETS> 212,279,134
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,246,370
<OTHER-INCOME> 0
<EXPENSES-NET> (1,495,046)
<NET-INVESTMENT-INCOME> 10,751,324
<REALIZED-GAINS-CURRENT> 2,330,741
<APPREC-INCREASE-CURRENT> 3,355,147
<NET-CHANGE-FROM-OPS> 16,437,212
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (296,128)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 471,457
<NUMBER-OF-SHARES-REDEEMED> (99,234)
<SHARES-REINVESTED> 15,933
<NET-CHANGE-IN-ASSETS> 24,481,638
<ACCUMULATED-NII-PRIOR> 19,798
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (6,520,219)
<GROSS-ADVISORY-FEES> (1,126,660)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,495,046)
<AVERAGE-NET-ASSETS> 6,101,965
<PER-SHARE-NAV-BEGIN> 10.940
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> 0.310
<PER-SHARE-DIVIDEND> (0.540)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.260
<EXPENSE-RATIO> 1.290
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 208,920,163
<INVESTMENTS-AT-VALUE> 223,146,111
<RECEIVABLES> 3,836,441
<ASSETS-OTHER> 385,549
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227,368,101
<PAYABLE-FOR-SECURITIES> 2,989,696
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 859,154
<TOTAL-LIABILITIES> 3,848,850
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 209,046,663
<SHARES-COMMON-STOCK> 18,301,302
<SHARES-COMMON-PRIOR> 16,347,421
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (43,595)
<ACCUMULATED-NET-GAINS> 290,235
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,225,948
<NET-ASSETS> 223,519,251
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,298,178
<OTHER-INCOME> 0
<EXPENSES-NET> (1,573,145)
<NET-INVESTMENT-INCOME> 10,725,033
<REALIZED-GAINS-CURRENT> 545,277
<APPREC-INCREASE-CURRENT> 5,243,088
<NET-CHANGE-FROM-OPS> 16,513,398
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,459,119)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,401,350
<NUMBER-OF-SHARES-REDEEMED> (1,917,780)
<SHARES-REINVESTED> 470,311
<NET-CHANGE-IN-ASSETS> 33,200,453
<ACCUMULATED-NII-PRIOR> 42,905
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (255,042)
<GROSS-ADVISORY-FEES> (1,166,952)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,573,145)
<AVERAGE-NET-ASSETS> 207,012,944
<PER-SHARE-NAV-BEGIN> 11.330
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.320
<PER-SHARE-DIVIDEND> (0.600)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.640
<EXPENSE-RATIO> 0.740
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 208,920,163
<INVESTMENTS-AT-VALUE> 223,146,111
<RECEIVABLES> 3,836,441
<ASSETS-OTHER> 385,549
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227,368,101
<PAYABLE-FOR-SECURITIES> 2,989,696
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 859,154
<TOTAL-LIABILITIES> 3,848,850
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 209,046,663
<SHARES-COMMON-STOCK> 896,787
<SHARES-COMMON-PRIOR> 445,910
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (43,595)
<ACCUMULATED-NET-GAINS> 290,235
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,225,948
<NET-ASSETS> 223,519,251
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,298,178
<OTHER-INCOME> 0
<EXPENSES-NET> (1,573,145)
<NET-INVESTMENT-INCOME> 10,725,033
<REALIZED-GAINS-CURRENT> 545,277
<APPREC-INCREASE-CURRENT> 5,243,088
<NET-CHANGE-FROM-OPS> 16,513,398
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (352,414)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 505,326
<NUMBER-OF-SHARES-REDEEMED> (72,523)
<SHARES-REINVESTED> 18,074
<NET-CHANGE-IN-ASSETS> 33,200,453
<ACCUMULATED-NII-PRIOR> 42,905
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (255,042)
<GROSS-ADVISORY-FEES> (1,166,952)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,573,145)
<AVERAGE-NET-ASSETS> 207,012,944
<PER-SHARE-NAV-BEGIN> 11.400
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.310
<PER-SHARE-DIVIDEND> (0.530)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.720
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 49,745,406
<INVESTMENTS-AT-VALUE> 53,120,718
<RECEIVABLES> 877,262
<ASSETS-OTHER> 352,455
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 54,350,435
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 139,705
<TOTAL-LIABILITIES> 139,705
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,732,838
<SHARES-COMMON-STOCK> 4,734,902
<SHARES-COMMON-PRIOR> 4,006,855
<ACCUMULATED-NII-CURRENT> 23,121
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (920,541)
<ACCUM-APPREC-OR-DEPREC> 3,375,312
<NET-ASSETS> 54,210,730
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,782,662
<OTHER-INCOME> 0
<EXPENSES-NET> (168,746)
<NET-INVESTMENT-INCOME> 2,613,916
<REALIZED-GAINS-CURRENT> 224,890
<APPREC-INCREASE-CURRENT> 1,505,198
<NET-CHANGE-FROM-OPS> 4,344,004
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,620,364)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,010,210
<NUMBER-OF-SHARES-REDEEMED> (383,160)
<SHARES-REINVESTED> 100,997
<NET-CHANGE-IN-ASSETS> 9,922,066
<ACCUMULATED-NII-PRIOR> 29,569
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (1,145,431)
<GROSS-ADVISORY-FEES> (304,904)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (392,450)
<AVERAGE-NET-ASSETS> 48,441,317
<PER-SHARE-NAV-BEGIN> 11.050
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> .400
<PER-SHARE-DIVIDEND> (.610)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.450
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 25
<NAME> FRANKLIN FED. INTEREMED. TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 146,402,048
<INVESTMENTS-AT-VALUE> 152,941,031
<RECEIVABLES> 2,264,785
<ASSETS-OTHER> 347,978
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,553,794
<PAYABLE-FOR-SECURITIES> 14,916,430
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,092,419
<TOTAL-LIABILITIES> 16,008,849
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 134,103,678
<SHARES-COMMON-STOCK> 12,400,498
<SHARES-COMMON-PRIOR> 9,571,206
<ACCUMULATED-NII-CURRENT> 164,161
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,261,877)
<ACCUM-APPREC-OR-DEPREC> 6,538,983
<NET-ASSETS> 139,544,945
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,542,250
<OTHER-INCOME> 0
<EXPENSES-NET> (875,242)
<NET-INVESTMENT-INCOME> 5,667,008
<REALIZED-GAINS-CURRENT> (95,778)
<APPREC-INCREASE-CURRENT> 3,620,765
<NET-CHANGE-FROM-OPS> 9,191,995
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,768,367)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,621,870
<NUMBER-OF-SHARES-REDEEMED> (5,106,923)
<SHARES-REINVESTED> 314,345
<NET-CHANGE-IN-ASSETS> 34,829,775
<ACCUMULATED-NII-PRIOR> 265,520
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (1,166,099)
<GROSS-ADVISORY-FEES> (718,091)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (965,218)
<AVERAGE-NET-ASSETS> 117,247,425
<PER-SHARE-NAV-BEGIN> 10.940
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> 0.330
<PER-SHARE-DIVIDEND> (0.550)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.250
<EXPENSE-RATIO> 0.750
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 55,964,671
<INVESTMENTS-AT-VALUE> 59,104,726
<RECEIVABLES> 670,223
<ASSETS-OTHER> 131,381
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59,906,330
<PAYABLE-FOR-SECURITIES> 1,742,238
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,359
<TOTAL-LIABILITIES> 1,847,597
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,110,276
<SHARES-COMMON-STOCK> 5,392,194
<SHARES-COMMON-PRIOR> 3,831,399
<ACCUMULATED-NII-CURRENT> 55,295
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (246,893)
<ACCUM-APPREC-OR-DEPREC> 3,140,055
<NET-ASSETS> 58,058,733
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,561,113
<OTHER-INCOME> 0
<EXPENSES-NET> (142,085)
<NET-INVESTMENT-INCOME> 2,419,028
<REALIZED-GAINS-CURRENT> 186,266
<APPREC-INCREASE-CURRENT> 1,729,964
<NET-CHANGE-FROM-OPS> 4,335,258
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,451,451)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,255,909
<NUMBER-OF-SHARES-REDEEMED> (788,836)
<SHARES-REINVESTED> 93,722
<NET-CHANGE-IN-ASSETS> 18,365,605
<ACCUMULATED-NII-PRIOR> 87,718
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (433,159)
<GROSS-ADVISORY-FEES> (300,020)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (388,505)
<AVERAGE-NET-ASSETS> 47,361,716
<PER-SHARE-NAV-BEGIN> 10.360
<PER-SHARE-NII> .540
<PER-SHARE-GAIN-APPREC> .420
<PER-SHARE-DIVIDEND> (.550)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.770
<EXPENSE-RATIO> .300
<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, 1998 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-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 93,891,246
<INVESTMENTS-AT-VALUE> 99,701,565
<RECEIVABLES> 1,970,989
<ASSETS-OTHER> 134,856
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,807,410
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 301,828
<TOTAL-LIABILITIES> 301,828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 96,916,948
<SHARES-COMMON-STOCK> 9,733,038
<SHARES-COMMON-PRIOR> 7,728,681
<ACCUMULATED-NII-CURRENT> 48,730
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,270,415)
<ACCUM-APPREC-OR-DEPREC> 5,810,319
<NET-ASSETS> 101,505,582
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,880,645
<OTHER-INCOME> 0
<EXPENSES-NET> (310,173)
<NET-INVESTMENT-INCOME> 4,570,472
<REALIZED-GAINS-CURRENT> 139,100
<APPREC-INCREASE-CURRENT> 3,782,107
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</TABLE>
