PROSPECTUS
FRANKLIN
TAX-FREE
TRUST
INVESTMENT STRATEGY
TAX-FREE INCOME
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, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUNDS
[Begin callout]
Information about each fund you should know before investing
[End callout]
2 Goals and Strategies
4 Main Risks
7 Performance
14 Fees and Expenses
17 Management
19 Distributions and Taxes
21 Financial Highlights
YOUR ACCOUNT
[Begin callout]
Information about sales charges, account transactions and services
[End callout]
27 Choosing a Share Class
31 Buying Shares
33 Investor Services
35 Selling Shares
37 Account Policies
40 Questions
FOR MORE INFORMATION
[Begin callout]
Where to learn more about each fund
[End callout]
Back Cover
THE FUNDS
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS Each fund's investment goal 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 exempt from
personal income taxes, if any, for resident shareholders of the fund's state.
PRINCIPAL INVESTMENTS Each fund normally invests predominately in municipal
securities whose interest is free from federal income taxes, including the
federal alternative minimum tax, and, in the case of each state fund, the
personal income taxes, if any, of the fund's state. Although each fund tries
to invest all of its assets in tax-free securities, it is possible, although
not anticipated, that up to 20% of its assets may be in securities that pay
taxable interest.
[Begin callout]
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 and private
projects. The issuer pays a fixed, floating or variable rate of interest, and
must repay the amount borrowed (the "principal") at maturity.
[End callout]
Each fund invests at least 65% of its total assets in insured municipal
securities, and under normal circumstances tries to invest more than 65% in
insured securities. Insured municipal securities are covered by insurance
policies that guarantee the timely payment of principal and interest.
Generally, the fund buys insured municipal securities only if they are
covered by policies issued by AAA-rated municipal bond insurers. Currently,
there are four municipal bond insurers with a AAA rating. The fund pays
insurance premiums either directly or indirectly, which increases the credit
safety of its insured investments, but decreases its yield.
Each fund may invest the balance of its assets in the following types of
securities: (i) uninsured 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 by U.S. nationally recognized rating services
(or comparable unrated securities), which may include uninsured securities
and insured securities covered by policies issued by insurers with a rating
below AAA but not below A; or (iii) uninsured short-term, tax-exempt
securities rated in the top rating, 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.
The manager selects securities that it believes will provide the best balance
between risk and return within a fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal. The manager also may consider
the cost of insurance when selecting securities for a fund.
Each fund also may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, a fund may be
unable to pursue its investment goals, because it may not invest or may
invest substantially less in tax-free securities or, in the case of the state
funds, in municipal securities of the fund's state.
IT IS IMPORTANT TO NOTE THAT INSURANCE DOES NOT GUARANTEE THE MARKET VALUE OF
AN INSURED SECURITY, OR THE FUND'S SHARE PRICE OR DISTRIBUTIONS, AND SHARES
OF THE FUND ARE NOT INSURED.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since each fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
Many of each fund's portfolio securities are supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support. A
change in the credit rating of any one or more of the municipal bond insurers
that insure securities in the fund's portfolio may affect the value of the
securities they insure, the fund's share price and fund performance. 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 entity to meet its obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions, the fund's yield, and the value of your investment
in the fund will go up and down. This means you could lose money over short
or even extended periods.
[End callout]
INTEREST RATE When interest rates go up, municipal security prices fall. The
opposite is also true: municipal security prices go up when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL There is the likelihood that a security will be prepaid (called) before
maturity. An issuer is more likely to call its securities when interest rates
are falling, because the issuer can issue new securities with lower interest
payments. If a security is called, the fund may have to replace it with a
lower-yielding security. At any time, each fund may have a large amount of
its assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and yield and its distributions to shareholders.
MARKET A security's value may 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 go up.
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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
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 The Arizona and Florida Funds are non-diversified funds. They
may invest a greater portion of their assets in the municipal securities of
one issuer than a diversified fund. These funds may be more sensitive to
economic, business, political or other changes affecting similar issuers or
securities, which may result in greater fluctuation in the value of their
shares. The funds, however, intend to meet certain tax diversification
requirements. The other funds are all diversified funds.
Each state fund may involve more risk than an investment in a fund that does
not focus on securities of a single state. The Franklin Insured Tax-Free
Income Fund is diversified nationally and will not invest more than 25% of
its total assets in the municipal securities of any one state or territory.
STATE 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 economic or political policy
changes, tax base erosion, state constitutional limits on tax increases,
budget deficits and other financial difficulties, and changes in the credit
ratings assigned to the state's 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 affect the fund's investments and its
performance.
U.S. TERRITORIES Each fund may invest in municipal securities issued by U.S.
territories. As with state municipal securities, events in any of these
territories where a fund is invested may affect the fund's investments and
its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the funds' manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the
issuers of municipal securities held by the funds to try to assess their Year
2000 readiness.
If an issuer in which a fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 18 for more information.
More detailed information about the funds, their policies (including
temporary investments), risks and municipal securities ratings can be found
in the funds' Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
The bar charts and tables below show the volatility of each fund's returns,
which is one indicator of the risks of investing in a fund. The bar charts
show changes in each fund's returns from year to year over the calendar years
shown. The tables show how each fund's average annual total returns compare
to those of a broad-based securities market index. Of course, past
performance cannot predict or guarantee future results.
ARIZONA FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
- -8.26% 21.20% 8.69% 4.59% 6.31%
94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
9.53%
WORST
QUARTER:
Q1 '94
- -7.89%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (4/30/93)
- -------------------------------------------------------------------------------
Arizona Fund 2 1.76% 5.17% 5.99%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 6.77%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.79%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
FLORIDA FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
- -9.85% 21.24 8.00% 5.02% 6.67%
94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
9.30%
WORST
QUARTER:
Q1 '94
- -8.79%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (4/30/93)
- -------------------------------------------------------------------------------
Florida Fund 2 2.16% 4.84% 5.46%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 6.77%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.68%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
INSURED FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.99% 6.57% 11.35% 9.38% 11.83% -3.59% 13.60% 4.18% 8.11% 6.04%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '89
5.68%
WORST
QUARTER:
Q1 '94
- -4.22%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Insured Fund - Class A 2 1.51% 4.61% 7.18%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Insured Fund - Class C 2 3.36% 6.25%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.83% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
MASSACHUSETTS FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.12% 5.10% 11.46% 8.98% 11.79% -3.63% 14.06% 8.53% 4.21% 5.39%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.87%
WORST
QUARTER:
Q1 '97
- -4.53%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Massachusetts Fund - Class A 2 0.93% 4.64% 6.93%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Massachusetts Fund - Class C 2 2.90% 6.18%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.95% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
MICHIGAN FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.49% 6.10% 10.96% 9.45% 12.09% -3.93% 13.83% 8.87% 3.58% 6.47%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '89
5.81%
WORST
QUARTER:
Q1 '97
- -4.60%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Michigan Fund - Class A 2 1.95% 4.69% 7.12%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Michigan Fund - Class C 2 3.90% 6.44%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 1.11% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
MINNESOTA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.46% 5.82% 10.86% 8.62% 10.98% -3.55% 13.31% 3.49% 7.69% 5.68%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.70%
WORST
QUARTER:
Q1 '94
- -3.83%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Minnesota Fund - Class A 2 1.19% 4.26% 6.67%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Minnesota Fund - Class C 2 3.14% 5.72%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.88% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
OHIO FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.25% 6.64% 10.95% 8.98% 12.47% -4.48% 14.34% 4.47% 8.16% 5.94%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.09%
WORST
QUARTER:
Q1 '94
- -4.75%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Ohio Fund - Class A 2 1.46% 4.60% 7.09%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- -------------------------------------------------------------------------------
Ohio Fund - Class C 2 3.25% 6.37%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.96% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of a fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
CLASS A 1 FUND FUND FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------
Maximum sales
charge (load)
as a percentage
<S> <C> <C> <C> <C> <C> <C> <C>
of offering price 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Load imposed
on purchases 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred
sales charge (load) 2 NONE NONE NONE NONE NONE NONE NONE
Exchange fee NONE NONE $5.00 4 NONE NONE NONE NONE
CLASS C 1
- --------------------------------------------------------------------------------------------------
Maximum sales
charge (load)
as a percentage
of offering price - - 1.99% 1.99% 1.99% 1.99% 1.99%
Load imposed
on purchases - - 1.00% 1.00% 1.00% 1.00% 1.00%
Maximum deferred
sales charge (load) 3 - - 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange fee - - $5.00 4 NONE NONE NONE NONE
Please see "Choosing a Share Class" on page 27 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
CLASS A 1 FUND FUND FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------
Management fees 0.66% 5 0.62% 5 0.47% 0.52% 0.47% 0.50% 0.48%
Distribution and service
(12b-1) fees 6 0.10% 0.10% 0.09% 0.09% 0.09% 0.09% 0.09%
Other expenses 0.08% 0.07% 0.06% 0.07% 0.07% 0.08% 0.08%
Total annual fund
operating expenses 0.84% 5 0.79% 5 0.62% 0.68% 0.63% 0.67% 0.65%
CLASS C 1
- -------------------------------------------------------------------------------------------------
Management fees - - 0.47% 0.52% 0.47% 0.50% 0.48%
Distribution and service
(12b-1 fees) 6 - - 0.65% 0.65% 0.65% 0.65% 0.65%
Other expenses - - 0.06% 0.07% 0.07% 0.08% 0.08%
Total annual fund
operating expenses - - 1.18% 1.24% 1.19% 1.23% 1.21%
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page 27).
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page 38).
5. For the fiscal year ended February 28, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.19% for the Arizona Fund and 0.25% for the Florida Fund, and total
annual fund operating expenses were 0.37% for the Arizona Fund and 0.42% for
the Florida Fund. The manager may end this arrangement at any time upon
notice to the fund's Board of Trustees.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in a fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------
CLASS A
1 Year 1 $507 $502 $486 $492 $487 $491 $489
3 Years $682 $667 $615 $633 $618 $630 $624
5 Years $871 $845 $756 $788 $761 $782 $772
10 Years $1,418 $1,361 $1,166 $1,236 $1,178 $1,224 $1,201
CLASS C
1 Year 2 - - $317 $323 $318 $322 $320
3 Years - - $471 $489 $474 $486 $480
5 Years - - $743 $774 $748 $769 $758
10 Years - - $1,517 $1,585 $1,529 $1,574 $1,551
</TABLE>
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $219 for the Insured
Fund, $225 for the Massachusetts Fund, $220 for the Michigan Fund, $224 for
the Minnesota Fund, and $222 for the Ohio Fund if you did not sell your
shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is each fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the funds' management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the Arizona and Florida
Funds since their inception and the Insured, Massachusetts, Michigan,
Minnesota and Ohio Funds since 1987. He is the Director of Franklin's
Municipal Bond Department. He joined the Franklin Templeton Group in 1986.
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Insured, Michigan
and Minnesota Funds since 1987. She joined the Franklin Templeton Group in
1986.
CARRIE HIGGINS, PORTFOLIO MANAGER OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the Arizona Fund
since its inception. She joined the Franklin Templeton Group in 1990.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the Arizona and
Florida Funds since their inception and the Insured, Massachusetts, Michigan,
Minnesota and Ohio Funds since 1989. He joined the Franklin Templeton Group
in 1986.
FRANCISCO RIVERA, PORTFOLIO MANAGER OF ADVISERS
Mr. Rivera has been an analyst or portfolio manager of the Massachusetts Fund
since 1996. He joined the Franklin Templeton Group in 1994.
STELLA WONG, VICE PRESIDENT OF ADVISERS
Ms. Wong has been an analyst or portfolio manager of the Florida Fund since
its inception and the Ohio Fund since 1986. She joined the Franklin Templeton
Group in 1986.
Each fund pays the manager a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended February 28, 1999, the
funds paid the following management fees to the manager:
MANAGEMENT FEES
- -------------------------------------------------------------------------------
Arizona Fund 0.19% 1
Florida Fund 0.25% 1
Insured Fund 0.47%
Massachusetts Fund 0.52%
Michigan Fund 0.47%
Minnesota Fund 0.50%
Ohio Fund 0.48%
1. Management fees, before any advance waiver, were 0.66% for the Arizona
Fund and 0.62% for the Florida Fund. Under an agreement by the manager to
limit its fees, the Arizona and Florida Funds paid the management fees shown.
The manager may end this arrangement at any time upon notice to the fund's
Board of Trustees.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The funds' manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the funds and their manager may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund declares dividends daily
from its net investment income and pays them monthly on or about the 20th day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed twice a year. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in a fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. Each
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Any capital gains a fund distributes are
taxable to you as long-term capital gains no matter how long you have owned
your shares. Distributions of ordinary income or capital gains are taxable
whether you reinvest your distributions in additional fund shares or receive
them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs a fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. Each fund
may invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, generally are exempt from that state's
personal income tax. Most states, however, do not grant tax-free treatment to
interest from municipal securities of other states.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in a fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The tables below present each fund's financial performance for the past five
years. This information has been audited by PricewaterhouseCoopers LLP.
ARIZONA FUND YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 10.77 10.36 10.36 9.80 10.28
---------------------------------
Net investment income .53 .54 .55 .55 .55
Net realized and unrealized gains (losses) .07 .42 - .57 (.48)
--------------------------------
Total from investment operations .60 .96 .55 1.12 .07
--------------------------------
Distributions from net investment income (.53) (.55) (.55) (.56) (.55)
--------------------------------
Net asset value, end of year 10.84 10.77 10.36 10.36 9.80
----------------------------------
Total return (%) 1 5.75 9.53 5.55 11.64 .94
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 80,684 58,059 39,693 38,199 20,794
Ratios to average net assets: (%)
Expenses .37 .30 .25 .16 .10
Expenses excluding waiver
and payments by affiliate .84 .82 .86 .86 .96
Net investment income 4.87 5.11 5.45 5.51 5.80
Portfolio turnover rate (%) 10.68 17.44 18.27 4.12 44.61
1. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.
FLORIDA FUND YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 10.43 9.99 10.02 9.53 10.07
----------------------------------
Net investment income .51 .53 .53 .53 .52
Net realized and unrealized gains (losses) .10 .44 (.03) .49 (.53)
--------------------------------
Total from investment operations .61 .97 .50 1.02 (.01)
--------------------------------
Distributions from net investment income (.51) (.53) (.53) (.53) (.53)
---------------------------------
Net asset value, end of year 10.53 10.43 9.99 10.02 9.53
---------------------------------
Total return (%) 1 6.01 9.94 5.17 10.95 .21
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 124,488 101,506 77,177 69,583 46,847
Ratios to average net assets: (%)
Expenses .42 .35 .35 .35 .35
Expenses excluding waiver
and payments by affiliate .79 .80 .80 .82 .88
Net investment income 4.88 5.16 5.36 5.37 5.61
Portfolio turnover rate (%) 1.81 8.08 32.23 24.36 43.71
1. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.
INSURED FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.31 12.15 12.27 11.97 12.45
----------------------------------
Net investment income .63 .66 .69 .71 .71
Net realized and unrealized gains (losses).06 .29 (.11) .30 (.48)
---------------------------------
Total from investment operations .69 .95 .58 1.01 .23
---------------------------------
Distributions from net investment income (.63) (.66) (.70) (.71) (.71)
In excess of net investment income (.01) (.01) - - -
Distributions from net realized gains (.10) (.12) - - -
----------------------------------
Total distributions (.74) (.79) (.70) (.71) (.71)
----------------------------------
Net asset value, end of year 12.26 12.31 12.15 12.27 11.97
Total return (%) 2 5.72 8.09 4.88 8.66 2.03
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1 million) 1,727 1,685 1,662 1,705 1,683
Ratios to average net assets: (%)
Expenses .62 .61 .60 .60 .59
Net investment income 5.11 5.44 5.68 5.81 6.00
Portfolio turnover rate (%) 13.16 27.77 18.66 13.52 14.42
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.38 12.21 12.31 11.98
------------------------------
Net investment income .57 .60 .62 .54
Net realized and unrealized gains (losses).05 .29 (.09) .32
-----------------------------
Total from investment operations .62 .89 .53 .86
-----------------------------
Distributions from net investment income (.57) 3 (.60) (.63) (.53)
Distributions from net realized gains (.10) (.12) - -
-----------------------------
Total distributions (.67) (.72) (.63) (.53)
-----------------------------
Net asset value, end of year 12.33 12.38 12.21 12.31
------------------------------
Total return (%) 2 5.12 7.52 4.42 7.32
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 65,166 38,057 21,521 8,152
Ratios to average net assets: (%)
Expenses 1.18 1.18 1.17 1.18 4
Net investment income 4.54 4.86 5.10 5.21 4
Portfolio turnover rate (%) 13.16 27.77 18.66 13.52
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Includes distributions in excess of net investment income in the amount of
$.004.
4. Annualized.
MASSACHUSETTS FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.75 11.54 11.65 11.34 11.81
-------------------------------------
Net investment income .59 .61 .63 .66 .66
Net realized and unrealized gains (losses).03 .35 (.10) .31 (.47)
------------------------------------
Total from investment operations .62 .96 .53 .97 .19
------------------------------------
Distributions from net investment income (.59) (.61) (.64) 2(.66) (.66)
In excess of net investment income - (.01) - - -
Distributions from net realized gains (.07) (.13) - - -
------------------------------------
Total distributions (.66) (.75) (.64) (.66) (.66)
------------------------------------
Net asset value, end of year 11.71 11.75 11.54 11.65 11.34
-------------------------------------
Total return (%) 3 5.36 8.50 4.75 8.80 1.83
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 340,109 328,147 325,065 301,529 288,331
Ratios to average net assets: (%)
Expenses .68 .68 .68 .69 .67
Net investment income 4.99 5.21 5.51 5.67 5.89
Portfolio turnover rate (%) 6.80 30.46 29.22 10.29 16.90
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.80 11.59 11.69 11.36
----------------------------
Net investment income .52 .55 .57 .50
Net realized and unrealized gains (losses).03 .34 (.09) .32
--------------------------
Total from investment operations .55 .89 .48 .82
--------------------------
Distributions from net investment income (.52) (.55) (.58) 2(.49)
Distributions from net realized gains (.07) (.13) - -
---------------------------
Total distributions (.59) (.68) (.58) (.49)
---------------------------
Net asset value, end of year 11.76 11.80 11.59 11.69
----------------------------
Total return (%) 3 4.74 7.86 4.22 7.36
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 26,271 13,937 6,378 2,759
Ratios to average net assets: (%)
Expenses 1.24 1.25 1.25 1.26 4
Net investment income 4.44 4.59 4.96 5.06 4
Portfolio turnover rate (%) 6.80 30.46 29.22 10.29
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
MICHIGAN FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.20 12.00 12.09 11.76 12.24
-------------------------------------
Net investment income .61 .63 .66 .68 .69
Net realized and unrealized gains (losses).13 .34 (.09) .34 (.48)
-----------------------------------
Total from investment operations .74 .97 .57 1.02 .21
-----------------------------------
Distributions from net investment income (.61) (.63) (.66) 3 (.69) 2 (.69)
In excess of net investment income - (.01) - - -
Distributions from net realized gains (.05) (.13) - - -
-----------------------------------
Total distributions (.66) (.77) (.66) (.69) (.69)
-----------------------------------
Net asset value, end of year 12.28 12.20 12.00 12.09 11.76
-------------------------------------
Total return (%) 4 6.23 8.37 4.90 8.86 1.87
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1 million) 1,161 1,143 1,112 1,115 1,038
Ratios to average net assets: (%)
Expenses .63 .63 .62 .62 .61
Net investment income 4.98 5.24 5.52 5.65 5.87
Portfolio turnover rate (%) 7.37 20.08 30.03 9.38 9.12
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.27 12.07 12.14 11.77
-----------------------------
Net investment income .55 .57 .59 .51
Net realized and unrealized gains (losses).13 .33 (.07) .37
---------------------------
Total from investment operations .68 .90 .52 .88
---------------------------
Distributions from net investment income (.54) (.57) (.59) (.51)
Distributions from net realized gains (.05) (.13) - -
---------------------------
Total distributions (.59) (.70) (.59) (.51)
---------------------------
Net asset value, end of year 12.36 12.27 12.07 12.14
-----------------------------
Total return (%) 4 5.71 7.70 4.44 7.58
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 49,970 32,873 20,162 6,683
Ratios to average net assets: (%)
Expenses 1.19 1.20 1.19 1.20 5
Net investment income 4.42 4.67 4.94 5.03 5
Portfolio turnover rate (%) 7.37 20.08 30.03 9.38
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Includes distributions in excess of net investment income in the amount of
$.002.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Annualized.
MINNESOTA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.16 12.01 12.14 11.88 12.33
-----------------------------------
Net investment income .61 .64 .65 .67 .69
Net realized and unrealized gains (losses).01 .25 (.12) .27 (.45)
----------------------------------
Total from investment operations .62 .89 .53 .94 .24
----------------------------------
Distributions from net investment income (.62) 3 (.64) (.66) (.68) (.69) 2
Distributions from net realized gains (.02) (.10) - - -
----------------------------------
Total distributions (.64) (.74) (.66) (.68) (.69)
----------------------------------
Net asset value, end of year 12.14 12.16 12.01 12.14 11.88
------------------------------------
Total return (%) 4 5.18 7.60 4.54 8.06 2.12
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 515,174 495,315 482,128 492,139 479,934
Ratios to average net assets: (%)
Expenses .67 .65 .66 .66 .66
Net investment income 5.01 5.29 5.47 5.58 5.81
Portfolio turnover rate (%) 16.25 14.87 14.40 17.72 17.59
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.21 12.05 12.17 11.89
----------------------------
Net investment income .54 .57 .59 .50
Net realized and unrealized gains (losses).01 .26 (.12) .28
--------------------------
Total from investment operations .55 .83 .47 .78
--------------------------
Distributions from net investment income (.55) 3 (.57) (.59) (.50)
Distributions from net realized gains (.02) (.10) - -
--------------------------
Total distributions (.57) (.67) (.59) (.50)
--------------------------
Net asset value, end of year 12.19 12.21 12.05 12.17
----------------------------
Total return (%) 4 4.58 7.04 3.98 6.67
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 20,896 10,131 4,844 1,152
Ratios to average net assets: (%)
Expenses 1.23 1.22 1.23 1.25 5
Net investment income 4.44 4.72 4.87 4.94 5
Portfolio turnover rate (%) 16.25 14.87 14.40 17.72
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions from net realized gains of $.004.
3. Includes distributions in excess of net investment income in the amount of
$.001.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Annualized.
OHIO FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.45 12.19 12.22 11.90 12.40
-----------------------------------
Net investment income .62 .64 .66 .68 .69
Net realized and unrealized gains (losses).07 .33 (.03) .33 (.50)
----------------------------------
Total from investment operations .69 .97 .63 1.01 .19
----------------------------------
Distributions from net investment income (.62) (.64) 4 (.66) 3(.69) 2(.69)
Distributions from net realized gains (.03) (.07) - - -
----------------------------------
Total distributions (.65) (.71) (.66) (.69) (.69)
----------------------------------
Net asset value, end of year 12.49 12.45 12.19 12.22 11.90
------------------------------------
Total return (%) 5 5.63 8.22 5.35 8.66 1.74
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 776,592 741,079 698,360 685,783 652,545
Ratios to average net assets: (%)
Expenses .65 .64 .64 .64 .63
Net investment income 4.98 5.24 5.43 5.58 5.83
Portfolio turnover rate (%) 6.56 12.84 14.95 11.47 11.76
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.51 12.24 12.26 11.90
-----------------------------
Net investment income .55 .58 .59 .52
Net realized and unrealized gains (losses).08 .34 (.02) .35
---------------------------
Total from investment operations .63 .92 .57 .87
---------------------------
Distributions from net investment income (.55) (.58) (.59) (.51)
Distributions from net realized gains (.03) (.07) - -
----------------------------
Total distributions (.58) (.65) (.59) (.51)
----------------------------
Net asset value, end of year 12.56 12.51 12.24 12.26
----------------------------
Total return (%) 5 5.10 7.66 4.79 7.43
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 42,258 28,178 15,786 6,085
Ratios to average net assets: (%)
Expenses 1.21 1.20 1.20 1.22 6
Net investment income 4.42 4.67 4.80 4.99 6
Portfolio turnover rate (%) 6.56 12.84 14.95 11.47
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Includes distributions in excess of net investment income in the amount of
$.003.
4. Includes distributions in excess of net investment income in the amount of
$.007.
5. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
6. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] 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. Your investment
representative can help you decide.
CLASS A CLASS C (ALL FUNDS EXCEPT
ARIZONA AND FLORIDA)
- ----------------------------------------------------------------------
o Initial sales charge of 4.25% or o Initial sales charge of 1%
less
o Deferred sales charge of 1% on o Deferred sales charge of 1% on
purchases of $1 million or more shares you sell within 18
sold within 12 months months
o Lower annual expenses than Class o Higher annual expenses than
C due to lower distribution fees Class A due to higher
distribution fees.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as
a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 29), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 28).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.15% per year for the Arizona and Florida Funds
and 0.10% per year for the remaining funds, to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C The CDSC for each class
is based on the current value of the shares being sold or their net asset
value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 34 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The Franklin Templeton Funds include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION
OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. The CDSC for
each class also may be waived for certain redemptions and distributions. If
you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. A
list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- -------------------------------------------------------------------------------
INITIAL ADDITIONAL
Regular accounts $1,000 $50
UGMA/UTMA accounts $100 $50
Broker-dealer sponsored wrap account programs $250 $50
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and their
immediate family members $100 $50
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- ----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] THROUGH investment investment
YOUR INVESTMENT representative representative
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] BY MAIL payable to the fund. payable to the fund.
Include your account
Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- ----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
BY WIRE and wire instructions. and wire instructions.
1-800/632-2301 Wire the funds and To make a same day
(or 1-650/312-2000 mail your signed wire investment,
collect) application to please call us by
Investor Services. 1:00 p.m. pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 3:00 p.m.
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. pacific
time and make sure
your wire arrives by
3:00 p.m.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
BY EXCHANGE signed written automated TeleFACTS
instructions. The system, or send
TeleFACTS(R) TeleFACTS system signed written
1-800/247-1753 cannot be used to instructions.
(around-the-clock open a new account.
access) (Please see page 34
(Please see page 34 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with handset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in a fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account
with an automatic investment plan is $50. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of a fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of a fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you
reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class C shareholders may reinvest their distributions in Class A shares of
any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to
sell or exchange your shares and make certain other changes to your account
by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 38).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature
guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
- ----------------------------------------------------------------------
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking] THROUGH
YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] BY MAIL share certificates (if you hold share
certificates) to Investor Services.
Corporate, partnership or trust accounts
may need to send additional documents.
Specify the fund, the account number and
the dollar value or number of shares you
wish to sell. Be sure to include all
necessary signatures and any additional
documents, as well as signature guarantees
if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
- ----------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000
phone] BY PHONE or less, you do not hold share certificates
1-800/632-2301 and you have not changed your address by
phone within the last 15 days, you can sell
your shares by phone.
A check will be mailed to the name(s) and
address on the account. Written
instructions, with a signature guarantee,
are required to send the check to another
address or to make it payable to another
person.
- ----------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank
BY WIRE or escrow account. See the policies above
for selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information
on file. If we do not have this
information, you will need to send written
instructions with your bank's name and
address, your bank account number, the ABA
routing number, and a signature guarantee.
Requests received in proper form by 1:00
p.m. pacific time will be wired the next
business day.
- ----------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund
arrows pointing in you are considering.
opposite directions]
BY
EXCHANGE Call Shareholder Services at the number
below or our automated TeleFACTS system, or
TeleFACTS(R) send signed written instructions. See the
1-800/247-1753 policies above for selling shares by mail
(around-the-clock or phone.
access)
If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates its net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its
applicable minimum investment amount. If you choose not to do so within 30
days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds'
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two
or more owners are registered as "joint tenants with rights of survivorship"
(shown as "Jt Ten" on your account statement). To make any ownership changes
to a joint account, all owners must agree in writing, regardless of the law
in your state.
MARKET TIMERS The Insured Fund may restrict or refuse exchanges by market
timers. If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. The
remaining funds do not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) - 2.00
Investment under $100,000 4.00 -
$100,000 but under $250,000 3.25 -
$250,000 but under $500,000 2.25 -
$500,000 but under $1 million 1.85 -
$1 million or more up to 0.75 1 -
12B-1 FEE TO DEALER 0.15% (Arizona and 0.65 2
Florida Funds)
0.10% (all other funds)
A dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE MONDAY THROUGH FRIDAY)
NUMBER
- ----------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting
the SEC's Public Reference Room in Washington D.C. (phone
1-800/SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009. You can also visit the
SEC's Internet site at http://www.sec.gov.
Investment Company Act file #811-4149 TF1 P 07/99
Prospectus
FRANKLIN
TAX-FREE
TRUST
INVESTMENT STRATEGY
TAX-FREE INCOME
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
July 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goals and Strategies
4 Main Risks
7 Performance
17 Fees and Expenses
20 Management
23 Distributions and Taxes
25 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
35 Choosing a Share Class
38 Buying Shares
40 Investor Services
42 Selling Shares
44 Account Policies
47 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
THE FUNDS
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS Each fund's investment goal 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 exempt from personal
income taxes, if any, for resident shareholders of the fund's state.
PRINCIPAL INVESTMENTS Each fund normally invests predominately in municipal
securities whose interest is free from federal income taxes, including the
federal alternative minimum tax, and the personal income taxes, if any, of
the fund's state. Although each fund tries to invest all of its assets in
tax-free securities, it is possible, although not anticipated, that up to 20%
of its assets may be in securities that pay taxable interest.
[Begin callout]
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 and private
projects. The issuer pays a fixed, floating or variable rate of interest, and
must repay the amount borrowed (the "principal") at maturity.
[End callout]
Each fund only buys securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within a fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal.
Each fund also may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, a fund may be
unable to pursue its investment goals, because it may not invest or may
invest substantially less in tax-free securities or in municipal securities
of the fund's state.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
Many of each fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent a fund holds insured securities, a change in the credit rating
of any one or more of the municipal bond insurers that insure securities in
the fund's portfolio may affect the value of the securities they insure, the
fund's share price and fund performance. 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
entity to meet its obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions, the fund's yield, and the value of your investment
in the fund will go up and down. This means you could lose money over short
or even extended periods.
[End callout]
INTEREST RATE When interest rates go up, municipal security prices fall. The
opposite is also true: municipal security prices go up when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL There is the likelihood that a security will be prepaid (called) before
maturity. An issuer is more likely to call its securities when interest rates
are falling, because the issuer can issue new securities with lower interest
payments. If a security is called, the fund may have to replace it with a
lower-yielding security. At any time, each fund may have a large amount of
its assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and yield and its distributions to shareholders.
MARKET A security's value may 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 go up.
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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
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 The Maryland Fund is a non-diversified fund. It may invest a
greater portion of its assets in the municipal securities of one issuer than
a diversified fund. This fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities, which may
result in greater fluctuation in the value of its shares. The fund, however,
intends to meet certain tax diversification requirements. The other funds are
all diversified funds. Each fund may involve more risk than an investment in
a fund that does not focus on securities of a single state.
STATE 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 economic or political policy changes,
tax base erosion, state constitutional limits on tax increases, budget
deficits and other financial difficulties, and changes in the credit ratings
assigned to the state's 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.
U.S. TERRITORIES Each fund may invest up to 35% of its assets in municipal
securities issued by U.S. territories. As with state municipal securities,
events in any of these territories where a fund is invested may affect the
fund's investments and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the funds' manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the
issuers of municipal securities held by the funds to try to assess their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 21 for more information.
More detailed information about the funds, their policies (including
temporary investments), risks and municipal securities ratings can be found
in the funds' Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
The bar charts and tables below show the volatility of each fund's returns,
which is one indicator of the risks of investing in a fund. The bar charts
show changes in each fund's returns from year to year over the calendar years
shown. The tables show how each fund's average annual total returns compare
to those of a broad-based securities market index. Of course, past
performance cannot predict or guarantee future results.
ALABAMA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.85% 5.29 12.40% 8.79% 12.24% -4.44% 15.28% 4.95% 9.03% 3.42%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
6.25%
WORST
QUARTER:
Q1 '94
- -4.36%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Alabama Fund - Class A 2 -0.96% 4.54% 7.08%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
Alabama Fund - Class C 0.84% 6.15%
Lehman Brothers Municipal Bond Index3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 1.00% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
FLORIDA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.82% 6.08% 12.56% 8.81% 12.01% -3.34% 14.67% 4.39% 8.11% 6.34%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
5.93%
WORST
QUARTER:
Q1 '94
- -3.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
Florida Fund - Class A 2 1.79% 4.96% 7.37%
Lehman Brothers Municipal Bond Index3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
Florida Fund - Class C 3.66% 6.57%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.73% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
GEORGIA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
[Begin callout]
BEST
QUARTER:
Q2 '89
6.23%
WORST
QUARTER:
Q1 '94
- -4.26%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Georgia Fund - Class A 2 1.13% 4.62% 7.19%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Georgia Fund - Class C 2 3.01% 6.21%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.63% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
KENTUCKY FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.48% 13.90% -8.52% 19.86% 4.26% 9.35% 6.09%
92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
8.79%
WORST
QUARTER:
Q1 '94
- -7.34%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (10/12/91)
- -----------------------------------------------------------------------------
Kentucky Fund - Class A 2 1.56% 4.89% 7.03%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 7.65%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.73%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, the fund implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
LOUISIANA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.68% 6.50% 12.23% 8.98% 11.13% -4.80% 14.59% 4.83% 8.79% 5.39%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q2 '89
5.93%
WORST
QUARTER:
Q1 '94
- -4.47%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Louisiana Fund - Class A 2 0.88% 4.66% 7.24%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ----------------------------------------------------------------------------
Louisiana Fund - Class C 2 2.71% 6.57%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.81% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
MARYLAND FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.78% 5.41% 12.06% 8.87% 12.15% -5.09% 17.27% 3.96% 8.54% 5.88%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
7.25%
WORST
QUARTER:
Q1 '94
- -4.78%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Maryland Fund - Class A 2 1.36% 4.96% 7.26%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Maryland Income Fund - Class C 2 3.20% 6.82%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.73% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
MISSOURI FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.74% 6.66% 11.97% 9.02% 13.28% -5.09% 15.68% 4.70% 9.14% 5.76%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
6.44%
WORST
QUARTER:
Q1 '94
- -4.84%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Missouri Fund - Class A 2 1.27% 4.91% 7.48%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Missouri Fund - Class C 2 3.13% 6.76%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.88% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
NORTH CAROLINA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.29% 6.33% 11.50% 9.12% 11.67% -5.73% 16.12% 4.08% 8.91% 5.94%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
7.28%
WORST
Quarter:
Q1 '94
- -4.97%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
North Carolina Fund - Class A 2 1.42% 4.71% 7.20%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
North Carolina Fund - Class C 2 3.48% 6.64%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.70% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
TEXAS FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.51% 6.04% 12.14% 8.56% 11.59% -2.79% 13.32% 5.17% 9.10% 5.10%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q2 '89
5.56%
WORST
QUARTER:
Q1 '94
- -3.48%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Texas Fund - Class A 2 0.63% 4.92% 7.31%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Texas Fund - Class C 2 2.51% 6.78%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.80% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
VIRGINIA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.06% 5.91% 12.53% 8.95% 12.40% -4.64% 15.45% 4.17% 8.50% 5.83%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST
QUARTER:
Q1 '95
6.53%
WORST
QUARTER:
Q1 '94
- -4.30%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Virginia Fund - Class A 2 1.30% 4.75% 7.32%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
Virginia Fund - Class C 2 3.25% 6.55%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 1999, the fund's year-to-date return was 0.77% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
May 1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of a fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA
FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------
CLASS A 1
Maximum sales charge (load) as
a percentage of offering price 4.25% 4.25% 4.25% 4.25% 4.25%
Load imposed on purchases 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred
sales charge (load) 2 None None None None None
Exchange fee None None None None None
Class C 1
Maximum sales charge (load) as
a percentage of offering price 1.99% 1.99% 1.99% - 1.99%
Load imposed on purchases 1.00% 1.00% 1.00% - 1.00%
Maximum deferred
sales charge (load) 3 0.99% 0.99% 0.99% - 0.99%
Exchange fee None None None - None
NORTH
MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------
CLASS A 1
Maximum sales charge (load) as
a percentage of offering price 4.25% 4.25% 4.25% 4.25% 4.25%
Load imposed on purchases 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred
sales charge (load) 2 None None None None None
Exchange fee None None None None None
Class C 1
Maximum sales charge (load) as
a percentage of offering price 1.99% 1.99% 1.99% 1.99% 1.99%
Load imposed on purchases 1.00% 1.00% 1.00% 1.00% 1.00%
Maximum deferred
sales charge (load) 3 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange fee None None None None None
Please see "Choosing a Share Class" on page 35 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA
FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------
CLASS A 1
Management fees 0.56% 0.47% 0.58% 0.63%4 0.59%
Distribution and service (12b-1)
fees 5 0.09% 0.09% 0.10% 0.10% 0.09%
Other expenses 0.06% 0.05% 0.08% 0.08% 0.07%
---------------------------------
Total annual fund operating
expenses 0.71% 0.61% 0.76% 0.81%4 0.75%
===================================
CLASS C 1
Management fees 0.56% 0.47% 0.58% - 0.59%
Distribution and service (12b-1)
fees5 0.65% 0.65% 0.65% - 0.65%
Other expenses 0.06% 0.05% 0.08% - 0.07%
----------------------------------
Total annual fund operating
expenses 1.27% 1.17% 1.31% - 1.31%
==================================
NORTH
MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------
CLASS A 1
Management fees 0.55% 0.53% 0.53% 0.59% 0.52%
Distribution and service (12b-1
) fees 5 0.10% 0.10% 0.10% 0.09% 0.09%
Other expenses 0.09% 0.07% 0.07% 0.09% 0.07%
--------------------------------
Total annual fund operating
expenses 0.74% 0.70% 0.70% 0.77% 0.68%
===============================
CLASS C 1
Management fees 0.55% 0.53% 0.53% 0.59% 0.52%
Distribution and service (12b-1)
fees 5 0.65% 0.65% 0.65% 0.65% 0.65%
Other expenses 0.09% 0.07% 0.07% 0.09% 0.07%
--------------------------------
Total annual fund operating
expenses 1.29% 1.25% 1.25% 1.33% 1.24%
================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page 35).
3. This is equivalent to a charge of 1% based on net asset value.
4. For the fiscal year ended February 28, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.24% and total annual fund operating expenses were 0.42%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in a fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA
FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------
CLASS A
1 Year 1 $494 $485 $499 $504 $498
3 Years $642 $612 $658 $673 $654
5 Years $803 $751 $829 $856 $824
10 Years $1,270 $1,155 $1,327 $1,384 $1,316
CLASS C
1 Year 2 $326 $316 $330 - $330
3 Years $499 $468 $511 - $511
5 Years $790 $737 $811 - $811
10 Years $1,619 $1,506 $1,663 - $1,663
NORTH
MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------
CLASS A
1 Year 1 $497 $493 $493 $500 $492
3 Years $651 $639 $639 $661 $633
5 Years $819 $798 $798 $835 $788
10 Years $1,304 $1,259 $1,259 $1,339 $1,236
CLASS C
1 Year 2 $328 $324 $324 $332 $323
3 Years $505 $493 $493 $517 $489
5 Years $800 $779 $779 $821 $774
10 Years $1,641 $1,596 $1,596 $1,685 $1,585
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $228 for the Alabama
Fund, $218 for the Florida Fund, $232 for the Georgia Fund, $232 for the
Louisiana Fund, $230 for the Maryland Fund, $226 for the Missouri Fund, $226
for the North Carolina Fund, $234 for the Texas Fund and $225 for the
Virginia Fund if you did not sell your shares at the end of the first year.
Your costs for the remaining periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is each fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the funds' management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of each fund since its
inception. He is the Director of Franklin's Municipal Bond Department. He
joined the Franklin Templeton Group in 1986.
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Florida and
Missouri Funds since their inception. She joined the Franklin Templeton Group
in 1986.
BEN BARBER, VICE PRESIDENT OF ADVISERS
Mr. Barber has been an analyst or portfolio manager of the Alabama and
Missouri Funds since 1993. He joined the Franklin Templeton Group
in 1991.
MARK ORSI, VICE PRESIDENT OF ADVISERS
Mr. Orsi has been an analyst or portfolio manager of the Kentucky, North
Carolina and Virginia Funds since 1991. He joined the Franklin Templeton
Group in 1990.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the Alabama, Georgia
and Maryland Funds since 1989. He joined the Franklin Templeton Group in 1986.
FRANCISCO RIVERA, PORTFOLIO MANAGER OF ADVISERS
Mr. Rivera has been an analyst or portfolio manager of the Georgia, Kentucky,
Louisiana and Texas Funds since 1996. He joined the Franklin Templeton Group
in 1994.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Louisiana and Texas
Funds since 1991. He joined the Franklin Templeton Group in 1989.
STELLA WONG, VICE PRESIDENT OF ADVISERS
Ms. Wong has been an analyst or portfolio manager of the Florida, Maryland,
North Carolina and Virginia Funds since their inception. She joined the
Franklin Templeton Group in 1986.
Each fund pays the manager a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended February 28, 1999, the
funds paid the following management fees to the manager:
MANAGEMENT
FEES
- ------------------------------------------------------------------------------
Alabama Fund 0.56%
Florida Fund 0.47%
Georgia Fund 0.58%
Kentucky Fund 0.24% 1
Louisiana Fund 0.59%
Maryland Fund 0.55%
Missouri Fund 0.53%
North Carolina Fund 0.53%
Texas Fund 0.59%
Virginia Fund 0.52%
1. Management fees, before any advance waiver, were 0.63%. Under an agreement
by the manager to limit its fees, the fund paid the management fees shown.
The manager may end this arrangement at any time upon notice to the fund's
Board of Trustees.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The funds' manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the funds and their manager may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund declares dividends daily
from its net investment income and pays them monthly on or about the 20th day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed twice a year. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in a fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. Each
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Any capital gains a fund distributes are
taxable to you as long-term capital gains no matter how long you have owned
your shares. Distributions of ordinary income or capital gains are taxable
whether you reinvest your distributions in additional fund shares or receive
them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs a fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December
but paid in January are taxable as if they were paid
in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. Each fund
may invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, generally are exempt from that state's
personal income tax. Most states, however, do not grant tax-free treatment to
interest from municipal securities of other states.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in a fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents each fund's financial performance for the past five
years. This information has been audited by PricewaterhouseCoopers LLP.
ALABAMA FUND
CLASS A YEAR ENDED FEBRUARY 28,
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.98 11.73 11.73 11.31 11.80
-----------------------------
Net investment income .62 .64 .65 .66 .66
Net realized and unrealized gains
(losses) (.25) .36 .01 .42 (.50)
----------------------------
Total from investment operations .37 1.00 .66 1.08 .16
---------------------------
Distributions from net investment
income (.62)2 (.65) (.66) (.66) (.65)
-----------------------------
Distributions from net realized
gains (.05) (.10) - - -
-----------------------------
Total distributions (.67) (.75) (.66) (.66) (.65)
-----------------------------
Net asset value, end of year 11.68 11.98 11.73 11.73 11.31
==============================
Total return (%) 3 3.21 8.79 5.84 9.74 1.54
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 238,670 216,982 193,466 185,981 170,051
Ratios to average net assets: (%)
Expenses .71 .72 .71 .72 .72
Net investment income 5.23 5.39 5.62 5.69 5.88
Portfolio turnover rate (%) 8.67 10.44 15.47 12.39 19.85
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.04 11.78 11.77 11.36
-----------------------
Net investment income .56 .58 .59 .49
Net realized and unrealized gains
(losses) (.25) .36 .01 .41
----------------------
Total from investment operations .31 .94 .60 .90
---------------------
Distributions from net investment
income (.56) 2 (.58) (.59)(.49)
-------------------------
Distributions from net realized
gains (.05) (.10) - -
------------------------
Total distributions (.61) (.68) (.59) (.49)
-----------------------
Net asset value, end of year 11.74 12.04 11.78 11.77
=======================
Total return (%)3 2.62 8.23 5.28 8.01
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 14,895 9,469 5,683 1,662
Ratios to average net assets: (%)
Expenses 1.27 1.29 1.28 1.29 4
Net investment income 4.67 4.80 5.05 5.09 4
Portfolio turnover rate (%) 8.67 10.44 15.47 12.39
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.006 and $.004 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
FLORIDA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.87 11.59 11.69 11.35 11.77
-----------------------------
Net investment income .62 .64 .67 .69 .69
Net realized and unrealized gains
(losses) .05 .30 (.08) .34 (.44)
----------------------------
Total from investment operations .67 .94 .59 1.03 .25
----------------------------
Distributions from net investment
income (.62) 2 (.65)(.69)(.69)(.67)
----------------------------
Distributions from net realized
gains (.01) (.01) - - -
----------------------------
Total distributions (.63) (.66) (.69) (.69) (.67)
----------------------------
Net asset value, end of year 11.91 11.87 11.59 11.69 11.35
=============================
Total return (%)3 5.75 8.37 5.20 9.28 2.36
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1 million) 1,786 1,650 1,458 1,354 1,265
Ratios to average net assets: (%)
Expenses .61 .61 .60 .60 .59
Net investment income 5.19 5.45 5.78 5.93 6.15
Portfolio turnover rate (%) 7.66 5.60 12.00 11.78 14.34
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.96 11.67 11.76 11.37
-----------------------
Net investment income .55 .60 .60 .52
Net realized and unrealized gains
(losses) .06 .29 (.07) .38
-----------------------
Total from investment operations .61 .89 .53 .90
-----------------------
Distributions from net investment
income (.55)2 (.59) (.62)(.51)
Distributions from net realized
gains (.01) (.01) - -
-----------------------
Total distributions (.56) (.60) (.62)(.51)
-----------------------
Net asset value, end of year 12.01 11.96 11.67 11.76
========================
Total return (%)3 5.21 7.80 4.65 8.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 82,596 56,027 23,556 7,644
Ratios to average net assets: (%)
Expenses 1.17 1.17 1.17 1.18 4
Net investment income 4.63 4.88 5.17 5.33 4
Portfolio turnover rate (%) 7.66 5.60 12.00 11.78
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.0005 and $.0004 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
GEORGIA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.12 11.86 11.88 11.54 12.00
-----------------------------
Net investment income .61 .63 .65 .66 .66
Net realized and unrealized gains
(losses) .01 .27 (.02) .34 (.46)
------------------------------
Total from investment operations .62 .90 .63 1.00 .20
------------------------------
Distributions from net investment
income (.61)2 (.64)3(.65) (.66) (.66)
Distributions from net realized
gains (.06) - - - -
-------------------------------
Total distributions (.67) (.64) (.65) (.66) (.66)
-----------------------------
Net asset value, end of year 12.07 12.12 11.86 11.88 11.54
=============================
Total return (%)4 5.22 7.75 5.47 8.90 1.87
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 164,669 149,642 139,903 130,380 116,771
Ratios to average net assets: (%)
Expenses .76 .76 .75 .77 .76
Net investment income 5.00 5.28 5.49 5.58 5.76
Portfolio turnover rate (%) 12.84 14.77 17.47 10.98 36.17
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.19 11.92 11.92 11.57
-----------------------
Net investment income .54 .57 .58 .50
Net realized and unrealized gains
(losses) .02 .27 (.01) .34
-----------------------
Total from investment operations .56 .84 .57 .84
-----------------------
Distributions from net investment
income (.54)2 (.57)(.57) (.49)
Distributions from net realized
gains (.06) - - -
-----------------------
Total distributions (.60) (.57) (.57) (.49)
Net asset value, end of year 12.15 12.19 11.92 11.92
=======================
Total return (%)4 4.70 7.19 4.97 7.40
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 17,277 9,107 4,484 1,335
Ratios to average net assets: (%)
Expenses 1.31 1.32 1.32 1.34 5
Net investment income 4.45 4.72 4.87 5.04 5
Portfolio turnover rate (%) 12.84 14.77 17.47 10.98
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.004 and $.003 for Class A and C, respectively.
3. Includes distributions in excess of net investment income in the amount of
$.001.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Annualized.
KENTUCKY FUND YEAR ENDED FEBRUARY 28,
- ---------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ---------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.45 11.05 11.04 10.54 11.18
-----------------------------
Net investment income .59 .61 .61 .62 .61
Net realized and unrealized
gains (losses) .03 .40 .01 .50 (.62)
-----------------------------
Total from investment operations .62 1.01 .62 1.12 (.01)
-----------------------------
Distributions from net investment
income (.60 1(.61) (.61) (.62) (.63)
-------------------------------
Net asset value, end of year 11.47 11.45 11.05 11.04 10.54
=============================
Total return (%)2 5.51 9.38 5.86 10.73 .11
Ratios/supplemental data
Net assets, end of year
($ x 1,000) 64,516 54,211 44,289 38,991 32,831
Ratios to average net assets: (%)
Expenses .42 .35 .34 .33 .29
Expenses excluding waiver and
payments by affiliate .81 .81 .81 .82 .80
Net investment income 5.12 5.40 5.63 5.65 5.94
Portfolio turnover rate (%) 10.49 26.61 24.81 31.89 32.92
1. Includes distribution in excess of net investment income in the amount of
$.004.
2. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.
LOUISIANA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.61 11.32 11.32 11.03 11.56
------------------------------
Net investment income .60 .63 .65 .66 .66
Net realized and unrealized gains
(losses) (.01) .30 - .28 (.55)
------------------------------
Total from investment operations .59 .93 .65 .94 .11
---------------------------
Distributions from net investment
income (.61)2 (.64) (.65)(.65) (.64)
-----------------------------
Net asset value, end of year 11.59 11.61 11.32 11.32 11.03
=============================
Total return (%)3 5.23 8.46 5.94 8.75 1.14
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 158,099 134,922 112,981 107,461 104,980
Ratios to average net assets: (%)
Expenses .75 .76 .76 .78 .75
Net investment income 5.14 5.50 5.76 5.89 5.98
Portfolio turnover rate (%) 14.99 15.26 13.68 5.23 32.28
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.68 11.37 11.37 11.01
-----------------------
Net investment income .54 .57 .58 .49
Net realized and unrealized gains
(losses) (.01) .32 - .35
-----------------------
Total from investment operations .53 .89 .58 .84
-----------------------
Distributions from net investment
income (.55)2 (.58)(.58) (.48)
------------------------
Net asset value, end of year 11.66 11.68 11.37 11.37
=======================
Total return (%)3 4.61 8.02 5.27 7.76
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 9,982 4,469 3,004 1,438
Ratios to average net assets: (%)
Expenses 1.31 1.32 1.33 1.35 4
Net investment income 4.58 4.95 5.29 5.27 4
Portfolio turnover rate (%) 14.99 15.26 13.68 5.23
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.0006 and $.0004 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
MARYLAND FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.64 11.33 11.38 10.92 11.36
-----------------------------
Net investment income .58 .59 .61 .62 .63
Net realized and unrealized gains
(losses) .06 .32 (.03) .47 (.45)
----------------------------
Total from investment operations .64 .91 .58 1.09 .18
---------------------------
Distributions from net investment
income (.58)2 (.60)3 (.63)(.63)(.62)
----------------------------
Distributions from net realized
gains (.04) - - - -
----------------------------
Total distributions (.62) (.60) (.63) (.63) (.62)
-----------------------------
Net asset value, end of year 11.66 11.64 11.33 11.38 10.92
=============================
Total return (%)4 5.64 8.27 5.24 10.18 1.78
Ratios/supplemental data
Net assets, end of year
($ x 1,000) 253,014 213,005 185,234 175,078 153,145
Ratios to average net assets: (%)
Expenses .74 .74 .73 .74 .73
Net investment income 4.91 5.20 5.42 5.56 5.86
Portfolio turnover rate (%) 6.02 3.19 12.71 8.11 20.30
Class C
Per share data ($)
Net asset value, beginning of year 11.72 11.40 11.44 10.93
-----------------------
Net investment income .51 .54 .55 .47
Net realized and unrealized gains
(losses) .07 .31 (.03) .51
-----------------------
Total from investment operations .58 .85 .52 .98
-----------------------
Distributions from net investment
income (.51)2 (.53)(.56)(.47)
Distributions from net realized
gains (.04) - - -
-----------------------
Total distributions (.55) (.53) (.56) (.47)
-----------------------
Net asset value, end of year 11.75 11.72 11.40 11.44
=======================
Total return (%)4 5.11 7.70 4.68 9.06
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 16,826 10,515 5,084 913
Ratios to average net assets: (%)
Expenses 1.29 1.30 1.27 1.31 5
Net investment income 4.35 4.63 4.78 4.95 5
Portfolio turnover rate (%) 6.02 3.19 12.71 8.11
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.004 and $.003 for Class A and C, respectively.
3. Includes distributions in excess of net investment income in the amount of
$.005.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Annualized.
MISSOURI FUND
CLASS A YEAR ENDED FEBRUARY 28,
- ----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.23 11.83 11.94 11.44 11.94
-----------------------------
Net investment income .61 .64 .65 .65 .65
Net realized and unrealized gains
(losses) - .44 (.07) .49 (.50)
----------------------------
Total from investment operations .61 1.08 .58 1.14 .15
---------------------------
Distributions from net investment
income (.62) (.64) (.65) (.64) (.65)
Distributions from net realized
gains (.03) (.04) (.04) - -
---------------------------
Total distributions (.65) (.68) (.69) (.64) (.65)
-----------------------------
Net asset value, end of year 12.19 12.23 11.83 11.94 11.44
=============================
Total return (%)2 5.12 9.43 5.06 10.23 1.44
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 386,948 308,045 269,564 247,522 227,442
Ratios to average net assets: (%)
Expenses .70 .71 .70 .71 .70
Net investment income 4.99 5.32 5.56 5.58 5.75
Portfolio turnover rate (%) 15.21 14.30 21.81 18.27 19.84
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.27 11.85 11.97 11.47
-----------------------
Net investment income .54 .58 .57 .48
Net realized and unrealized gains
(losses) .01 .45 (.07) .50
----------------------
Total from investment operations .55 1.03 .50 .98
----------------------
Distributions from net investment
income (.55) (.57) (.58) (.48)
Distributions from net realized
gains (.03) (.04) (.04) -
----------------------
Total distributions (.58) (.61) (.62) (.48)
-----------------------
Net asset value, end of year 12.24 12.27 11.85 11.97
=======================
Total return (%)2 4.58 8.96 4.32 8.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 20,396 10,045 4,295 1,325
Ratios to average net assets: (%)
Expenses 1.25 1.27 1.27 1.27 3
Net investment income 4.44 4.75 4.92 4.94 3
Portfolio turnover rate (%) 15.21 14.30 21.81 18.27
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Annualized.
NORTH CAROLINA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.11 11.73 11.75 11.37 11.92
-----------------------------
Net investment income .60 .62 .64 .64 .65
Net realized and unrealized gains
(losses .06 .38 (.03) .39 (.55)
-----------------------------
Total from investment operations .66 1.00 .61 1.03 .10
-----------------------------
Distributions from net investment
income (.61) (.62) (.63) (.65)2 (.65)
-------------------------------
Net asset value, end of year 12.16 12.11 11.73 11.75 11.37
=============================
Total return (%)3 5.54 8.78 5.38 9.28 1.06
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 349,419 297,406 260,979 247,031 216,263
Ratios to average net assets: (%)
Expenses .70 .70 .70 .71 .70
Net investment income 4.95 5.24 5.47 5.52 5.75
Portfolio turnover rate (%) 5.44 9.95 9.98 25.19 25.05
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.18 11.79 11.80 11.41
-----------------------
Net investment income .54 .56 .57 .49
Net realized and unrealized gains
(losses) .06 .39 (.02) .38
-----------------------
Total from investment operations .60 .95 .55 .87
-----------------------
Distributions from net investment
income (.54) (.56) (.56) (.48)
-----------------------
Net asset value, end of year 12.24 12.18 11.79 11.80
=======================
Total return (%)3 5.02 8.22 4.83 7.77
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 38,171 20,043 9,607 2,430
Ratios to average net assets: (%)
Expenses 1.25 1.26 1.26 1.28 4
Net investment income 4.40 4.69 4.85 4.90 4
Portfolio turnover rate (%) 5.44 9.95 9.98 25.19
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
TEXAS FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.68 11.37 11.58 11.25 11.72
-----------------------------
Net investment income .60 .62 .66 .67 .68
Net realized and unrealized gains
(losses) (.05) .36 - .34 (.49)
-----------------------------
Total from investment operations .55 .98 .66 1.01 .19
-----------------------------
Distributions from net investment
income (.60)2 (.63) (.67) (.68) (.66)
In excess of net investment income - (.01) - - -
Distributions from net realized
gains (.21) (.03) (.20) - -
-----------------------------
Total distributions (.81) (.67) (.87) (.68) (.66)
-----------------------------
Net asset value, end of year 11.42 11.68 11.37 11.58 11.25
=============================
Total return (%)3 4.86 8.91 5.91 9.15 1.80
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 127,739 130,578 126,612 129,702 130,684
Ratios to average net assets: (%)
Expenses .77 .76 .75 .76 .73
Net investment income 5.17 5.44 5.70 5.86 6.05
Portfolio turnover rate (%) 25.26 34.52 35.57 18.38 6.36
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.81 11.49 11.68 11.27
-----------------------
Net investment income .53 .58 .60 .51
Net realized and unrealized gains
(losses) (.03) .35 .02 .40
-----------------------
Total from investment operations .50 .93 .62 .91
-----------------------
Distributions from net investment
income (.53)2 (.58)4(.61)(.50)
Distributions from net realized
gains (.21) (.03) (.20 -
------------------------
Total distributions (.74) (.61) (.81) (.50)
-----------------------
Net asset value, end of year 11.57 11.81 11.49 11.68
=======================
Total return (%)3 4.40 8.31 5.48 8.23
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 5,229 2,076 740 79
Ratios to average net assets: (%)
Expenses 1.33 1.33 1.32 1.33 5
Net investment income 4.61 4.79 5.03 5.23 5
Portfolio turnover rate (%) 25.26 34.52 35.57 18.38
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.0005 and $.0003 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Includes distributions in excess of net investment income in the amount of
$.001.
5. Annualized.
VIRGINIA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.88 11.65 11.72 11.33 11.82
-----------------------------
Net investment income .60 .62 .65 .66 .66
Net realized and unrealized gains
(losses) .03 .35 (.07) .38 (.50)
----------------------------
Total from investment operations .63 .97 .58 1.04 .16
---------------------------
Distributions from net investment
income (.60)2 (.64) (.64)(.65) (.65)
Distributions from net realized
gains (.03) (.10) (.01) - -
---------------------------
Total distributions (.63) (.74) (.65) (.65) (.65)
-----------------------------
Net asset value, end of year 11.88 11.88 11.65 11.72 11.33
=============================
Total return (%)3 5.40 8.53 5.15 9.41 1.56
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 379,670 332,199 287,172 271,396 255,965
Ratios to average net assets: (%)
Expenses .68 .69 .69 .69 .69
Net investment income 4.98 5.29 5.56 5.66 5.86
Portfolio turnover rate (%) 8.90 12.90 19.25 12.72 21.73
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.95 11.71 11.77 11.35
-----------------------
Net investment income .53 .57 .58 .49
Net realized and unrealized gains
(losses) .03 .34 (.05) .41
------------------------
Total from investment operations .56 .91 .53 .90
------------------------
Distributions from net investment
income (.53)2 (.57)(.58) (.48)
Distributions from net realized
gains (.03) (.10) (.01) -
------------------------
Total distributions (.56) (.67) (.59) (.48)
-----------------------
Net asset value, end of year 11.95 11.95 11.71 11.77
=======================
Total return (%)3 4.78 7.97 4.61 8.07
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 22,796 13,186 6,674 2,050
Ratios to average net assets: (%)
Expenses 1.24 1.25 1.25 1.26 4
Net investment income 4.42 4.72 4.94 5.06 4
Portfolio turnover rate (%) 8.90 12.90 19.25 12.72
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
2. Includes distributions in excess of net investment income in the amount of
$.0005 and $.0004 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] 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. Your investment
representative can help you decide.
CLASS A CLASS C (ALL FUNDS EXCEPT KENTUCKY)
- --------------------------------------------------------------------------------
o Initial sales charge of 4.25% or o Initial sales charge of 1%
less
o Deferred sales charge of 1% on o Deferred sales charge of 1% on
purchases of $1 million or more shares you sell within 18 months
sold within 12 months
o Lower annual expenses than Class C o Higher annual expenses than Class A
due to lower distribution fees due to higher distribution fees.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 37), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 36).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution fees of up to 0.10% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 41 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge.
You also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge
that may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals and institutions or by investors
who reinvest certain distributions and proceeds within 365 days. The CDSC for
each class also may be waived for certain redemptions and distributions. If
you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. A
list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- ------------------------------------------------------------------------------
INITIAL ADDITIONAL
- ------------------------------------------------------------------------------
REGULAR ACCOUNTS $1,000 $50
- ------------------------------------------------------------------------------
UGMA/UTMA ACCOUNTS $100 $50
- ------------------------------------------------------------------------------
Broker-dealer sponsored wrap
account programs $250 $50
- -------------------------------------------------------------------------------
Full-time employees, officers,
trustees and directors of
Franklin Templeton entities,
and their immediate family
members $100 $50
- -------------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- ------------------------------------------------------------------------------
Opening an account Adding to an account
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR INVESTMENT representative representative
REPRESENTATIVE
- ------------------------------------------------------------------------------
Make your check payable Make your check payable
[Insert graphic of the fund. to the fund. Include
envelope] your account number on
Mail the check and your the check.
BY MAIL signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip,
include a note with
your name, the fund
name, and your account
number.
Mail the check and
deposit slip or note to
Investor Services.
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning bolts] control number and wire control number and wire
instructions. instructions.
- ------------------------------------------------------------------------------
Wire the funds and mail To make a same day wire
BY WIRE your signed application to investment, please call
Investor Services. Please us by 1:00 p.m. pacific
1-800/632-2301 include the wire control time and make sure your
(or 1-650/312-2000 number or your new account wire arrives by 3:00
collect) number on the application. p.m.
To make a same day wire Call to receive a
investment, please call us wire control number
by 1:00 p.m. pacific time and wire instructions.
and make sure your wire
arrives by 3:00 p.m.
[Insert graphic of two Call Shareholder Services at Call Shareholder
arrows pointing in the number below, or send Services at the number
opposite directions] signed written instructions. below or our automated
The TeleFACTS system cannot TeleFACTS system, or
be used to open a new send signed written
account. instructions.
- ------------------------------------------------------------------------------
BY EXCHANGE
TeleFACTS(R) (Please see page 41 for (Please see page 41 for
1-800/247-1753 information on exchanges.) information on
(around-the-clock exchanges.)
access).
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of a fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class C shareholders may reinvest their distributions in Class A shares of
any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 45).
Franklin Mutual Series Fund Inc.
*Certain Class Z shareholders of may exchange into Class A without any sales
charge. Advisor Class shareholders of another Franklin Templeton Fund also
may exchange into Class A without any sales charge. Advisor Class
shareholders who exchange their shares for Class A shares and later decide
they would like to exchange into another fund that offers Advisor Class may
do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
SELLING SHARES
- ------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold
share certificates) to Investor
BY MAIL Services. Corporate, partnership or trust
accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- ------------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- ------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds of $1,000 or more wired to a
bank or escrow account. See the policies above
for selling shares by mail or phone.
BY WIRE
Before requesting a bank wire, please make sure
we have your bank account information on file.
If we do not have this information, you will
need to send written instructions with your
bank's name and address, your bank account
number, the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- ------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund
arrows pointing in opposite you are considering.
directions]
Call Shareholder Services at the
BY EXCHANGE number below or our automated
TeleFACTS system, or send signed
TeleFACTS(R) written instructions. See the
1-800/247-1753 policies above for selling shares
(around-the-clock access) by mail or phone.
If you hold share certificates, you will need
to return them to the fund before your exchange
can be processed.
- ------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates its net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus
any applicable contingent deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds'
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The funds do not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing
pattern. Shares under common ownership or control are combined for these
limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of
an emergency or if the payment by check or wire would be harmful to
existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS C
COMMISSION (%) - 2.00
Investment under $100,000 4.00 -
$100,000 but under $250,000 3.25 -
$250,000 but under $500,000 2.25 -
$500,000 but under $1 million 1.85 -
$1 million or more up to 0.75 1 -
12B-1 FEE TO DEALER 0.10 0.65 2
A dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting
the SEC's Public Reference Room in Washington D.C. (phone 1-800/SEC-0330) or
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, DC 20549-6009. You can also visit the SEC's Internet
site at http://www.sec.gov.
Investment Company Act file #811-4149 TF2 P 07/99
Prospectus
FRANKLIN
TAX-FREE
TRUST
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Federal Intermediate 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, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goals and Strategies
5 Main Risks
9 Performance
20 Fees and Expenses
26 Management
29 Distributions and Taxes
31 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
43 Choosing a Share Class
48 Buying Shares
50 Investor Services
53 Selling Shares
55 Account Policies
58 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
THE FUNDS
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The Federal Intermediate Fund's investment goal 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 High Yield Fund's principal investment goal is to provide investors with a
high current yield exempt from federal income taxes. Its secondary goal is
capital appreciation to the extent possible and consistent with the fund's
principal investment goal.
The Puerto Rico Fund's investment goal 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 and may be changed without shareholder
approval.
Each state fund's investment goal is to provide investors with as high a level
of income exempt from federal income taxes and from personal income taxes for
resident shareholders of the fund's state as is consistent with prudent
investing, while seeking preservation of shareholders' capital.
PRINCIPAL INVESTMENTS Each fund normally invests predominately in municipal
securities whose interest is free from federal income taxes, including the
federal alternative minimum tax, and, in the case of each state fund, the
personal income taxes, if any, of the fund's state. The Puerto Rico Fund also
normally invests predominately in municipal securities whose interest is free
from the personal income taxes of a majority of states. Although each fund tries
to invest all of its assets in tax-free securities, it is possible, although not
anticipated, that up to 20% of its assets may be in securities that pay taxable
interest.
[Begin callout]
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 and private projects. The issuer
pays a fixed, floating or variable rate of interest, and must repay the amount
borrowed (the "principal") at maturity.
[End callout]
Each fund, except the High Yield Fund, only buys securities rated in the top
four ratings by U.S. nationally recognized rating services (or comparable
unrated securities). The High Yield Fund may invest in securities rated in any
rating, including defaulted securities, although it currently invests primarily
in securities rated BBB/Baa or below (or comparable unrated securities).
None of the funds have restrictions on the maturity of the securities they may
buy, although the Federal Intermediate Fund seeks to maintain a dollar-weighted
average portfolio maturity of three to 10 years.
The manager selects securities that it believes will provide the best balance
between risk and return within a fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for capital
gains, although the manager may sell a security at any time if it believes it
could help the fund meet its goal. 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 High
Yield Fund's portfolio.
Each fund also may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to a
state or local government and the lease payments are used to pay the interest on
the obligations. These differ from other municipal securities because the money
to make the lease payments must be set aside each year or the lease can be
cancelled without penalty. If this happens, investors who own the obligations
may not be paid.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities trading markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other unusual or adverse
conditions exist. Under these circumstances, a fund may be unable to pursue its
investment goals, because it may not invest or may invest substantially less in
tax-free securities or, in the case of the state and Puerto Rico Funds, in
municipal securities of the fund's state or territory.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since each fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make interest
payments and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact fund
performance.
Many of each fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support. To
the extent a fund holds insured securities, a change in the credit rating of any
one or more of the municipal bond insurers that insure securities in the fund's
portfolio may affect the value of the securities they insure, the fund's share
price and fund performance. 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 entity to meet its
obligations.
LOWER-RATED SECURITIES. Securities rated below the top four ratings, generally
have more credit risk than higher-rated securities. The High Yield Fund may
invest up to 100% of its assets in lower-rated securities. None of the other
funds invests in securities rated below the top four ratings.
The risk of default or price changes due to changes in the issuer's credit
quality is greater with lower-rated securities. 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 also are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they
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 also may be less liquid
than higher-rated securities.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions, the fund's yield, and the value of your investment in
the fund will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
INTEREST RATE When interest rates go up, municipal security prices fall. The
opposite is also true: municipal security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL There is the likelihood that a security will be prepaid (called) before
maturity. An issuer is more likely to call its securities when interest rates
are falling, because the issuer can issue new securities with lower interest
payments. If a security is called, the fund may have to replace it with a
lower-yielding security. At any time, each fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities may
lower the fund's income and yield and its distributions to shareholders.
MARKET A security's value may 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 go up.
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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be issued
on a when-issued or delayed delivery basis, where payment and delivery 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 The Connecticut, Federal Intermediate and Michigan Funds are
non-diversified funds. They may invest a greater portion of their assets in the
municipal securities of one issuer than a diversified fund. These funds may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities, which may result in greater fluctuation in the
value of their shares. The funds, however, intend to meet certain tax
diversification requirements. The other funds are all diversified funds.
Each state fund and the Puerto Rico Fund may involve more risk than an
investment in a fund that does not focus on securities of a single state or
territory. The Federal Intermediate and High Yield Funds are diversified
nationally. The High Yield Fund will not invest more than 25% of its total
assets in the municipal securities of any one state or territory.
STATE 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 economic or political policy changes, tax
base erosion, state constitutional limits on tax increases, budget deficits and
other financial difficulties, and changes in the credit ratings assigned to the
state's 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 and their
performance.
U.S. TERRITORIES The Puerto Rico Fund invests heavily in Puerto Rico municipal
securities and may invest up to 35% of its total assets in municipal securities
issued by other U.S. territories. Each of the other funds also may invest in
municipal securities issued by U.S. territories. As with state municipal
securities, events in any of these territories where a fund is invested may
affect the fund's investments and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the funds' manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the issuers
of municipal securities held by the funds to try to assess their Year 2000
readiness.
If an issuer in which a fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest and
principal payments also will be affected, at least temporarily. This may affect
both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance. Please
see page 28 for more information.
More detailed information about the funds, their policies (including temporary
investments), risks and municipal securities ratings can be found in the funds'
Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
The bar charts and tables below show the volatility of each fund's returns,
which is one indicator of the risks of investing in a fund. The bar charts show
changes in each fund's returns from year to year over the calendar years shown.
The tables show how each fund's average annual total returns compare to those of
a broad-based securities market index. Of course, past performance cannot
predict or guarantee future results.
ARIZONA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.74% 5.80% 12.24% 10.02% 11.18% -4.03% 14.59% 4.21% 8.23% 5.44%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.83%
WORST
QUARTER:
Q1 '94
- -4.32%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Arizona Fund - Class A 2 0.94% 4.60% 7.15%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
Since
Inception
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------
Arizona Fund - Class C 2 2.82% 6.29%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 1.05% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
COLORADO FUND - CLASS A ANNUAL TOTAL RETURNS 1
[INSERT BAR GRAPH]
9.90% 5.78% 12.35% 10.00% 12.74% -5.43% 16.07% 4.76% 8.82% 5.73%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.62%
WORST
QUARTER:
Q1 '94
- -5.02%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Colorado Fund - Class A 2 1.21% 4.85% 7.45%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Colorado Fund - Class C 2 3.17% 6.81%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.88% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
CONNECTICUT FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.95% 4.93% 10.77% 8.33% 12.32% -5.40% 14.32% 4.48% 8.50% 5.96%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '89
5.60%
WORST
QUARTER:
Q1 '94
- -4.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Connecticut Fund - Class A 2 1.44% 4.46% 6.82%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Connecticut Fund - Class C 2 3.35% 6.50%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 1.04% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
FEDERAL INTERMEDIATE FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
12.68% -2.71% 14.42% 6.68% 5.27% 5.80%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.19%
WORST
QUARTER:
Q1 '94
- -3.76%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
- --------------------------------------------------------------------------------
Federal Intermediate Fund 2 3.40% 5.28% 6.61%
Lehman Brothers Municipal 10-Year Bond Index 3 6.76% 6.35% 7.43%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.72%.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal 10-Year Bond Index includes investment grade bonds issued within the
last five years as part of a deal of over $50 million and with a maturity of at
least 10 years. It includes reinvested interest. One cannot invest directly in
an index, nor is an index representative of the fund's portfolio.
HIGH YIELD FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.79% 5.11% 12.40% 9.25% 13.27% -2.59% 16.29% 6.16% 10.60% 4.81%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.38%
WORST
QUARTER:
Q1 '94
- -3.02%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
High Yield Fund - Class A 2 0.32% 5.94% 7.91%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
High Yield Fund - Class C 2 2.15% 7.51%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 1.12% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
INDIANA FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
11.12% 5.98% 12.21% 9.85% 12.83% -4.99% 14.15% 5.02% 8.48% 5.58%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.55%
WORST
QUARTER:
Q1 '94
- -4.82%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
Indiana Fund 2 1.05% 4.55% 7.41%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.90%.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
MICHIGAN FUND ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.69% 7.57%
97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '97
4.07%
WORST
QUARTER:
Q1 '97
- -0.60%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (7/1/96)
- ---------------------------------------------------------------------------
Michigan Fund 2 3.04% 7.54%
Lehman Brothers Municipal Bond Index 3 6.48% 8.27%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.75%.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
NEW JERSEY FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.39% 6.56% 12.46% 9.19% 10.97% -5.21% 15.58% 4.04% 8.34% 6.11%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.44%
WORST
QUARTER:
Q1 '94
- -4.79%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
New Jersey Fund - Class A 2 1.59% 4.64% 7.14%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
New Jersey Fund - Class C 2 3.44% 6.56%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.81% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
OREGON FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.31% 5.55% 12.63% 8.66% 10.91% -4.93% 15.08% 4.32% 8.24% 5.44%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.54%
WORST
QUARTER:
Q1 '94
- -4.55%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Oregon Fund - Class A 2 0.93% 4.52% 6.93%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Oregon Fund - Class C 2 2.78% 6.30%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.87% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
PENNSYLVANIA FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.32% 3.87% 13.48% 9.83% 11.66% -3.29% 14.34% 4.50% 8.94% 5.48%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '89
5.97%
WORST
QUARTER:
Q1 '94
- -3.64%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Pennsylvania Fund - Class A 2 0.98% 4.91% 7.33%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Pennsylvania Fund - Class C 2 2.80% 6.52%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 0.85% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
PUERTO RICO FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.75% 5.38% 12.27% 9.12% 10.99% -4.28% 14.49% 5.08% 8.75% 5.74%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.95%
WORST
QUARTER:
Q1 '94
- -4.27%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Puerto Rico Fund - Class A 2 1.21% 4.87% 7.14%
Lehman Brothers Municipal Bond Index 3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ---------------------------------------------------------------------------
Puerto Rico Fund - Class C 2 3.18% 6.55%
Lehman Brothers Municipal Bond Index 3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 1999, the fund's year-to-date return was 1.37% for Class A.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. May 1, 1994, Class A implemented a Rule 12b-1 plan,
which affects subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last five
years as part of a deal of over $50 million and with a maturity of at least two
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of a fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD INDIANA
FUND FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------
CLASS A 1
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge
(load) as a percentage
of offering price 4.25% 4.25% 4.25% 2.25% 4.25% 4.25%
Load imposed on purchases 4.25% 4.25% 4.25% 2.25% 4.25% 4.25%
Maximum deferred sales
charge (load) 3 None None None None None None
Exchange fee None None None None None None
CLASS B 2
Maximum sales charge
(load) as a percentage
of offering price - - - - 4.00% -
Load imposed on purchases - - - - None -
Maximum deferred sales
charge (load) - - - - 4.00% -
Exchange fee - - - - None -
CLASS C 1
Maximum sales charge
(load) as a percentage
of offering price 1.99% 1.99% 1.99% - 1.99% -
Load imposed on purchases 1.00% 1.00% 1.00% - 1.00% -
Maximum deferred sales
charge (load) 4 0.99% 0.99% 0.99% - 0.99% -
Exchange fee None None None - None -
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
CLASS A 1
<S> <C> <C> <C> <C> <C>
Maximum sales charge
(load) as a percentage
of offering price 4.25% 4.25% 4.25% 4.25% 4.25%
Load imposed on purchases 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred sales
charge (load) 3 None None None None None
Exchange fee None None None None None
CLASS B 2
Maximum sales charge
(load) as a percentage
of offering price - - - - -
Load imposed on purchases - - - - -
Maximum deferred sales
charge (load) - - - - -
Exchange fee - - - - -
CLASS C 1
Maximum sales charge
(load) as a percentage
of offering price - 1.99% 1.99% 1.99% 1.99%
Load imposed on purchases - 1.00% 1.00% 1.00% 1.00%
Maximum deferred sales
charge (load) 4 - 0.99% 0.99% 0.99% 0.99%
Exchange fee - None None None None
</TABLE>
Please see "Choosing a Share Class" on page 43 for an explanation of how and
when these sales charges apply.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD INDIANA
FUND FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------
CLASS A 1
<S> <C> <C> <C> <C> <C> <C>
Management fees 0.48% 0.54% 0.56% 0.58% 5 0.46% 0.63%
Distribution and service
(12b-1) fees 6 0.09% 0.09% 0.09% 0.10% 0.09% 0.09%
Other expenses 0.06% 0.07% 0.07% 0.10% 0.07% 0.10%
---------------------------------------------------------------
Total annual fund
operating expenses 0.63% 0.70% 0.72% 0.78% 5 0.62% 0.82%
---------------------------------------------------------------
CLASS B 2
Management fees - - - - 0.46% -
Distribution and service
(12b-1) fees 6 - - - - 0.65% -
Other expenses - - - - 0.07% -
---------------------------------------------------------------
Total annual fund
operating expenses - - - - 1.18% -
---------------------------------------------------------------
CLASS C 1
Management fees 0.48% 0.54% 0.56% - 0.46% -
Distribution and service
(12b-1) fees 6 0.65% 0.65% 0.65% - 0.65% -
Other expenses 0.06% 0.07% 0.07% - 0.07% -
---------------------------------------------------------------
Total annual fund
operating expenses 1.19% 1.26% 1.28% - 1.18% -
---------------------------------------------------------------
MICHIGAN NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
CLASS A 1
<S> <C> <C> <C> <C> <C>
Management fees 0.63% 5 0.49% 0.51% 0.48% 0.56%
Distribution and service
(12b-1) fees 6 0.10% 0.09% 0.09% 0.09% 0.09%
Other expenses 0.21% 0.07% 0.07% 0.08% 0.09%
---------------------------------------------------------------
Total annual fund
operating expenses 0.94%5 0.65% 0.67% 0.65% 0.74%
---------------------------------------------------------------
CLASS B 2
Management fees - - - - -
Distribution and service
(12b-1) fees 6 - - - - -
Other expenses - - - - -
---------------------------------------------------------------
Total annual fund
operating expenses - - - - -
---------------------------------------------------------------
CLASS C 1
Management fees - 0.49% 0.51% 0.48% 0.56%
Distribution and service
(12b-1) fees 6 - 0.65% 0.65% 0.65% 0.65%
Other expenses - 0.07% 0.07% 0.08% 0.09%
---------------------------------------------------------------
Total annual fund
operating expenses - 1.21% 1.23% 1.21% 1.30%
---------------------------------------------------------------
</TABLE>
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The High Yield Fund began offering Class B shares on January 1, 1999. Annual
fund operating expenses are based on the expenses for Class A and C for the
fiscal year ended February 28, 1999. The distribution and service (12b-1) fees
are based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page 44).
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended February 28, 1999, the manager had agreed in
advance to waive or limit its management fees and to assume as its own expense
certain expenses otherwise payable by the fund. With this reduction, management
fees were 0.55% for the Federal Intermediate Fund and the Michigan Fund paid no
management fees. Total annual fund operating expenses were 0.75% for the Federal
Intermediate Fund and 0.25% for the Michigan Fund. The manager may end this
arrangement at any time upon notice to the fund's Board of Trustees.
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in a fund with the cost
of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD INDIANA
FUND FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------
CLASS A
<S> <C> <C> <C> <C> <C> <C>
1 Year 1 $487 $493 $495 $303 $486 $505
3 Years $618 $639 $645 $469 $615 $676
5 Years $761 $798 $809 $649 $756 $861
10 Years $1,178 $1,259 $1,281 $1,169 $1,166 $1,395
CLASS B
Assuming you sold your shares at the end of the period
1 Year - - - - $520 -
3 Years - - - - $675 -
5 Years - - - - $849 -
10 Years 2 - - - - $1,276 -
CLASS B
Assuming you stayed in the fund
1 Year - - - - $120 -
3 Years - - - - $375 -
5 Years - - - - $649 -
10 Years 2 - - - - $1,276 -
CLASS C
1 Year 3 $318 $325 $327 - $317 -
3 Years $474 $496 $502 - $471 -
5 Years $748 $785 $795 - $743 -
10 Years $1,529 $1,607 $1,630 - $1,517 -
MICHIGAN NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------
CLASS A
<C> <C> <C> <C> <C> <C>
1 Year 1 $517 $489 $491 $489 $497
3 Years $712 $624 $630 $624 $651
5 Years $923 $772 $782 $772 $819
10 Years $1,531 $1,201 $1,224 $1,201 $1,304
CLASS B
Assuming you sold your shares at the end of the period
1 Year - - - - -
3 Years - - - - -
5 Years - - - - -
10 Years - - - - -
CLASS B
Assuming you stayed in the fund
1 Year - - - - -
3 Years - - - - -
5 Years - - - - -
10 Years - - - - -
CLASS C
1 Year 3 - $320 $322 $320 $329
3 Years - $480 $486 $480 $508
5 Years - $758 $769 $758 $806
10 Years - $1,551 $1,574 $1,551 $1,652
</TABLE>
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $220 for the Arizona
Fund, $227 for the Colorado Fund, $229 for the Connecticut Fund, $219 for the
High Yield Fund, $222 for the New Jersey Fund, $224 for the Oregon Fund, $222
for the Pennsylvania Fund, and $231 for the Puerto Rico Fund if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is each fund's investment manager. Together, Advisers and its affiliates
manage over $227 billion in assets. Before October 1, 1998, the Connecticut
Fund's manager was Franklin Investment Advisory Services, Inc. The terms and
conditions of the management services Advisers provides are the same as those of
the previous manager.
The team responsible for the funds' management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the Arizona, Colorado,
Connecticut, Federal Intermediate, Indiana, Michigan, New Jersey and Oregon
Funds since their inception and the High Yield, Pennsylvania and Puerto Rico
Funds since 1987. He is the Director of Franklin's Municipal Bond Department. He
joined the Franklin Templeton Group in 1986.
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Arizona, Colorado,
Federal Intermediate, New Jersey and Oregon Funds since their inception and the
High Yield, Pennsylvania and Puerto Rico Funds since 1987. She joined the
Franklin Templeton Group in 1986.
BEN BARBER, VICE PRESIDENT OF ADVISERS
Mr. Barber has been an analyst or portfolio manager of the High Yield and Puerto
Rico Funds since 1993. He joined the Franklin Templeton Group in 1991.
CARRIE HIGGINS, PORTFOLIO MANAGER OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the Arizona and Colorado
Funds since 1992. She joined the Franklin Templeton Group in 1990.
MARK ORSI, VICE PRESIDENT OF ADVISERS
Mr. Orsi has been an analyst or portfolio manager of the Federal Intermediate
Fund since its inception. He joined the Franklin Templeton Group in 1990.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the Connecticut Fund
since 1989 and the Michigan Fund since its inception. He joined the Franklin
Templeton Group in 1986.
FRANCISCO RIVERA, PORTFOLIO MANAGER OF ADVISERS
Mr. Rivera has been an analyst or portfolio manager of the Michigan Fund since
its inception. He joined the Franklin Templeton Group in 1994.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Indiana and Oregon
Funds since 1991. He joined the Franklin Templeton Group in 1989.
STELLA WONG, VICE PRESIDENT OF ADVISERS
Ms. Wong has been an analyst or portfolio manager of the Connecticut, Indiana,
New Jersey and Pennsylvania Funds since their inception. She joined the Franklin
Templeton Group in 1986.
Each fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended February 28, 1999, the funds
paid, the following management fees to the manager:
MANAGEMENT
FEES
(as a percentage of
AVERAGE MONTHLY ASSETS)
--------------------------
Arizona Fund 0.48%
Colorado Fund 0.54%
Connecticut Fund 0.56%
Federal Intermediate Fund 0.55% 1
High Yield Fund 0.46%
Indiana Fund 0.63%
Michigan Fund 0.00% 1
New Jersey Fund 0.49%
Oregon Fund 0.51%
Pennsylvania Fund 0.48%
Puerto Rico Fund 0.56%
1. Management fees, before any advance waiver, were 0.58% for the Federal
Intermediate Fund and 0.63% for the Michigan Fund. Under an agreement by the
manager to waive or limit its fees, the Federal Intermediate Fund and Michigan
Funds paid the management fees shown. The manager may end this arrangement at
any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a leap year may
create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the funds'
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The funds' manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the funds' ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the funds and their manager may have no control.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund declares dividends daily from
its net investment income and pays them monthly on or about the 20th day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
twice a year. The amount of these distributions will vary and there is no
guarantee the fund will pay dividends.
Please keep in mind that if you invest in a fund shortly before the fund deducts
a capital gain distribution from its net asset value, you will receive some of
your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of exempt-interest
dividends from interest earned on municipal securities. In general,
exempt-interest dividends are exempt from federal income tax. Each fund,
however, may invest a portion of its assets in securities that pay income that
is not tax-exempt. Fund distributions from such income are taxable to you as
ordinary income. Any capital gains a fund distributes are taxable to you as
long-term capital gains no matter how long you have owned your shares.
Distributions of ordinary income or capital gains are taxable whether you
reinvest your distributions in additional fund shares or receive them in cash.
[Begin callout]
Backup Withholding
By law, a fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs a fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. Each fund may
invest a portion of its assets in private activity bonds. The income from these
bonds is a preference item when determining your alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, generally are exempt from that state's
personal income tax. Most states, however, do not grant tax-free treatment to
interest from municipal securities of other states.
Distributions of ordinary income and capital gains, and gains from the sale or
exchange of your fund shares generally will be subject to state and local income
tax. Non-U.S. investors may be subject to U.S. withholding and estate tax. You
should consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in a fund. If you are a resident of Puerto Rico,
you should consult with your tax advisor before investing in any of the funds.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
The tables below present each fund's financial performance for the past five
years or since inception if a fund or class has been in existence for less than
five years. This information has been audited by PricewaterhouseCoopers LLP.
ARIZONA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.44 11.24 11.34 11.11 11.58
--------------------------------------------
Net investment income .59 .61 .62 .64 .65
Net realized and unrealized
gains (losses) (.01) .29 (.04) .36 (.48)
--------------------------------------------
Total from investment operations .58 .90 .58 1.00 .17
--------------------------------------------
Distributions from net
investment income (.59) 2 (.61) (.63) (.65) (.64)
In excess of net
investment Income - (.01) - - -
Distributions from net
realized gains (.05) (.08) (.05) (.12) -
--------------------------------------------
Total distributions (.64) (.70) (.68) (.77) (.64)
--------------------------------------------
Net asset value, end of year 11.38 11.44 11.24 11.34 11.11
============================================
Total return (%) 3 5.17 8.23 5.33 9.24 1.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 861,020 810,250 752,335 750,797 720,801
Ratios to average net assets: (%)
Expenses .63 .63 .62 .62 .60
Net investment income 5.11 5.40 5.59 5.67 5.86
Portfolio turnover rate (%) 14.11 20.02 16.57 25.12 18.65
ARIZONA FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 28,
- ------------------------------------------------------------------------
1999 1998 1997 1996 1
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.51 11.30 11.38 11.15
------------------------------------
Net investment income .52 .56 .57 .49
Net realized and unrealized
gains (losses) (.01) .29 (.03) .34
------------------------------------
Total from investment operations .51 .85 .54 .83
------------------------------------
Distributions from net
investment income (.52) 2 (.56) (.57) (.48)
Distributions from net
realized gains (.05) (.08) (.05) (.12)
------------------------------------
Total distributions (.57) (.64) (.62) (.60)
------------------------------------
Net asset value, end of year 11.45 11.51 11.30 11.38
====================================
Total return (%) 3 4.54 7.67 4.89 7.60
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 23,871 14,537 5,486 1,892
Ratios to average net assets: (%)
Expenses 1.19 1.19 1.19 1.20 4
Net investment income 4.55 4.82 5.01 5.05 4
Portfolio turnover rate (%) 14.11 20.02 16.57 25.12
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Includes distributions in excess of net investment income in the amount of
$.002 and $.001 for Class A and C, respectively.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
COLORADO FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.11 11.80 11.84 11.38 11.94
--------------------------------------------
Net investment income .60 .63 .66 .67 .67
Net realized and unrealized
gains (losses) .02 .39 (.04) .45 (.57)
--------------------------------------------
Total from investment operations .62 1.02 .62 1.12 .10
--------------------------------------------
Dividends from net
investment income (.60) (.64) (.66) (.66) (.66)
Distributions from net
realized gains (.08) (.07) - - -
--------------------------------------------
Total distributions (.68) (.71) (.66) (.66) (.66)
--------------------------------------------
Net asset value, end of year 12.05 12.11 11.80 11.84 11.38
============================================
Total return (%) 2 5.24 8.86 5.44 10.12 1.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 301,381 266,599 236,609 215,609 194,564
Ratios to average net assets: (%)
Expenses .70 .71 .71 .71 .70
Net investment income 4.93 5.28 5.59 5.73 5.94
Portfolio turnover rate (%) 12.60 22.97 14.13 17.58 28.83
CLASS C
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.17 11.84 11.87 11.40
------------------------------------
Net investment income .54 .57 .59 .50
Net realized and unrealized
gains (losses) .02 .40 (.02) .46
------------------------------------
Total from investment operations .56 .97 .57 .96
------------------------------------
Distributions from net
investment income (.54) (.57) (.60) (.49)
Distributions from net
realized gains (.08) (.07) - -
------------------------------------
Total distributions (.62) (.64) (.60) (.49)
------------------------------------
Net asset value, end of year 12.11 12.17 11.84 11.87
====================================
Total return (%) 2 4.63 8.39 4.93 8.57
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 21,899 10,855 5,654 1,656
Ratios to average net assets: (%)
Expenses 1.26 1.27 1.28 1.29 3
Net investment income 4.38 4.72 4.99 5.12 3
Portfolio turnover rate (%) 12.60 22.97 14.13 17.58
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Annualized.
CONNECTICUT FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.23 10.92 10.96 10.64 11.23
--------------------------------------------
Net investment income .58 .60 .61 .62 .62
Net realized and unrealized
gains (losses) .04 .32 (.02) .32 (.60)
--------------------------------------------
Total from investment operations .62 .92 .59 .94 .02
--------------------------------------------
Distributions from net
investment income (.58) 2 (.60) (.63) (.62) (.61)
In excess of net
investment income - (.01) - - -
--------------------------------------------
Total distributions (.58) (.61) (.63) (.62) (.61)
--------------------------------------------
Net asset value, end of year 11.27 11.23 10.92 10.96 10.64
============================================
Total return (%) 3 5.62 8.62 5.52 9.04 .37
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 245,016 203,643 183,649 167,045 155,623
Ratios to average net assets: (%)
Expenses .72 .73 .72 .73 .71
Net investment income 5.08 5.41 5.62 5.70 5.83
Portfolio turnover rate (%) 5.87 18.54 14.53 3.88 75.72
CLASS C
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.26 10.94 10.97 10.65
------------------------------------
Net investment income .52 .55 .60 .47
Net realized and unrealized
gains (losses) .03 .31 (.07) .31
------------------------------------
Total from investment operations .55 .86 .53 .78
------------------------------------
Distributions from net
investment income (.51) 2 (.54) (.56) (.46)
------------------------------------
Net asset value, end of year 11.30 11.26 10.94 10.97
====================================
Total return (%) 3 5.02 8.08 5.03 7.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 23,443 8,636 4,149 1,656
Ratios to average net assets: (%)
Expenses 1.28 1.29 1.29 1.30 4
Net investment income 4.53 4.85 5.01 5.12 4
Portfolio turnover rate (%) 5.87 18.54 14.53 3.88
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Includes distributions in excess of net investment income in the amount of
$.002.
3. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
4. Annualized.
FEDERAL INTERMEDIATE FUND
YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.25 10.94 10.95 10.48 10.80
--------------------------------------------
Net investment income .51 .53 .55 .55 .54
Net realized and unrealized
gains (losses) .06 .33 (.01) .47 (.33)
--------------------------------------------
Total from investment operations .57 .86 .54 1.02 .21
--------------------------------------------
Distributions from net
investment income (.52) (.55) (.55) (.55) (.53)
--------------------------------------------
Net asset value, end of year 11.30 11.25 10.94 10.95 10.48
============================================
Total return (%) 1 5.17 8.02 5.12 9.93 (.20)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 195,598 139,545 104,715 85,967 73,977
Ratios to average net assets: (%)
Expenses .75 .75 .68 .65 .56
Expenses excluding waiver and
payments by affiliate .78 .82 .84 .85 .84
Net investment income 4.53 4.83 5.16 5.12 5.25
Portfolio turnover rate (%) 16.57 23.32 22.54 3.35 38.46
1. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.
HIGH YIELD FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1 1998 1997 1996 2 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.68 11.21 11.19 10.74 11.25
--------------------------------------------
Net investment income .66 .69 .71 .74 .74
Net realized and unrealized
gains (losses) (.18) .47 .04 .45 (.51)
--------------------------------------------
Total from investment operations .48 1.16 .75 1.19 .23
--------------------------------------------
Distributions from net
investment income (.65) (.68) (.73) 3 (.74) (.74)
In excess of net
investment Income - (.01) - - -
Distributions from net
realized gains (.02) - - - -
--------------------------------------------
Total distributions (.67) (.69) (.73) (.74) (.74)
--------------------------------------------
Net asset value, end of year 11.49 11.68 11.21 11.19 10.74
============================================
Total return (%) 4 4.21 10.64 7.01 11.35 2.28
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1 million) 5,988 5,743 4,505 3,787 3,287
Ratios to average net assets: (%)
Expenses .62 .61 .62 .61 .60
Net investment income 5.64 5.98 6.41 6.68 6.92
Portfolio turnover rate (%) 18.55 15.84 6.98 9.23 15.89
CLASS B
- ----------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of period 11.51
-------------
Net investment income .11
Distributions from net
investment income (.10)
-------------
Net asset value, end of period 11.52
=============
Total return (%) 4 .96
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 1,000) 15,487
Ratios to average net assets: (%)
Expenses 1.18 5
Net investment income 5.06 5
Portfolio turnover rate (%) 18.55
HIGH YIELD FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 28,
- ------------------------------------------------------------------------
1999 1 1998 1997 1996 2
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.75 11.26 11.24 10.81
------------------------------------
Net investment income .60 .63 .66 .56
Net realized and unrealized
gains (losses) (.18) .48 .03 .42
------------------------------------
Total from investment operations .42 1.11 .69 .98
------------------------------------
Distributions from net
investment income (.59) (.62) (.67) 6 (.55)
Distributions from net
realized gains (.02) - - -
------------------------------------
Total distributions (.61) (.62) (.67) (.55)
------------------------------------
Net asset value, end of year 11.56 11.75 11.26 11.24
====================================
Total return (%) 4 3.69 10.15 6.36 9.27
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 631,974 423,264 194,400 48,163
Ratios to average net assets: (%)
Expenses 1.18 1.18 1.18 1.18 5
Net investment income 5.07 5.38 5.78 6.07 5
Portfolio turnover rate (%) 18.55 15.84 6.98 9.23
1. For the period January 1, 1999 (effective date) to February 28, 1999 for
Class B.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Includes distributions in excess of net investment income in the amount of
$.008.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Annualized.
6. Includes distributions in excess of net investment income in the amount of
$.003.
INDIANA FUND
YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.07 11.77 11.76 11.40 12.01
--------------------------------------------
Net investment income .62 .65 .66 .67 .66
Net realized and unrealized
gains (losses) - .32 .01 .35 (.61)
--------------------------------------------
Total from investment operations .62 .97 .67 1.02 .05
--------------------------------------------
Distributions from net
investment income (.63) (.65) (.66) (.66) (.66)
Distributions from net
realized gains (.03) (.02) - - -
--------------------------------------------
Total distributions (.66) (.67) (.66) (.66) (.66)
--------------------------------------------
Net asset value, end of year 12.03 12.07 11.77 11.76 11.40
============================================
Total return (%) 1 5.25 8.52 5.91 9.20 .58
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 59,014 54,643 51,137 48,949 46,583
Ratios to average net assets: (%)
Expenses .82 .82 .82 .80 .81
Net investment income 5.12 5.45 5.69 5.80 5.84
Portfolio turnover rate (%) 18.79 24.08 23.54 10.56 26.49
1. Total return does not include sales charges. Before May 1, 1994, dividends
from net investment income were reinvested at the offering price.
MICHIGAN FUND
YEAR ENDED FEBRUARY 28,
- -----------------------------------------------------------------
1999 1998 1997 1
- -----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.02 10.42 10.00
-----------------------------
Net investment income .54 .51 .30
Net realized and unrealized gains .12 .67 .32
-----------------------------
Total from investment operations .66 1.18 .62
-----------------------------
Distributions from net
investment income (.57) (.58) (.20)
Distributions from net
realized gains (.02) - -
-----------------------------
Total distributions (.59) (.58) (.20)
-----------------------------
Net asset value, end of year 11.09 11.02 10.42
=============================
Total return (%) 2 6.15 11.62 6.17
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 17,117 9,268 3,884
Ratios to average net assets: (%)
Expenses .25 .25 .34 3
Expenses excluding waiver and
payments by affiliate .94 1.01 1.21 3
Net investment income 5.03 5.39 4.90 3
Portfolio turnover rate (%) 16.00 51.81 42.83
1. For the period July, 1 1996 (effective date) to February 28, 1997.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
NEW JERSEY FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.92 11.61 11.68 11.28 11.82
--------------------------------------------
Net investment income .61 .63 .64 .65 .66
Net realized and unrealized
gains (losses) .05 .32 (.06) .39 (.55)
--------------------------------------------
Total from investment operations .66 .95 .58 1.04 .11
--------------------------------------------
Distributions from net
investment income (.62) (.64) (.65) (.64) (.65)
--------------------------------------------
Net asset value, end of year 11.96 11.92 11.61 11.68 11.28
============================================
Total return (%) 2 5.63 8.37 5.13 9.43 1.12
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 681,818 636,929 574,691 564,864 533,973
Ratios to average net assets: (%)
Expenses .65 .66 .64 .65 .63
Net investment income 5.06 5.34 5.58 5.65 5.86
Portfolio turnover rate (%) 5.43 12.77 8.87 12.04 31.05
CLASS C
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.98 11.66 11.72 11.30
------------------------------------
Net investment income .54 .56 .57 .49
Net realized and unrealized
gains (losses) .06 .33 (.05) .40
------------------------------------
Total from investment operations .60 .89 .52 .89
------------------------------------
Distributions from net
investment income (.55) (.57) (.58) (.47)
------------------------------------
Net asset value, end of year 12.03 11.98 11.66 11.72
====================================
Total return (%) 2 5.09 7.84 4.57 8.02
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 48,715 28,139 13,095 4,542
Ratios to average net assets: (%)
Expenses 1.21 1.21 1.21 1.23 3
Net investment income 4.50 4.77 5.01 5.15 3
Portfolio turnover rate (%) 5.43 12.77 8.87 12.04
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Annualized.
OREGON FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.86 11.55 11.60 11.22 11.70
--------------------------------------------
Net investment income .59 .62 .63 .63 .63
Net realized and unrealized
gains (losses) (.01) .31 (.05) .38 (.49)
--------------------------------------------
Total from investment operations .58 .93 .58 1.01 .14
--------------------------------------------
Distributions from net
investment income (.61) (.62) (.63) (.63) (.62)
--------------------------------------------
Net asset value, end of year 11.83 11.86 11.55 11.60 11.22
============================================
Total return (%) 2 5.12 8.21 5.13 9.19 1.36
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 483,664 427,022 384,003 375,415 349,458
Ratios to average net assets: (%)
Expenses .67 .67 .66 .66 .65
Net investment income 5.00 5.33 5.52 5.51 5.71
Portfolio turnover rate (%) 10.65 12.18 4.47 6.52 26.44
CLASS C
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.92 11.61 11.65 11.23
------------------------------------
Net investment income .53 .56 .56 .47
Net realized and unrealized
gains (losses) - .31 (.04) .41
------------------------------------
Total from investment operations .53 .87 .52 .88
------------------------------------
Distributions from net
investment income (.55) (.56) (.56) (.46)
------------------------------------
Net asset value, end of year 11.90 11.92 11.61 11.65
====================================
Total return (%) 2 4.59 7.66 4.59 7.99
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 32,962 15,946 7,100 2,044
Ratios to average net assets: (%)
Expenses 1.23 1.22 1.23 1.24 3
Net investment income 4.44 4.74 4.93 4.87 3
Portfolio turnover rate (%) 10.65 12.18 4.47 6.52
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Annualized.
PENNSYLVANIA FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 10.56 10.39 10.44 10.16 10.56
--------------------------------------------
Net investment income .55 .58 .60 .62 .62
Net realized and unrealized
gains (losses) (.02) .32 (.04) .29 (.41)
--------------------------------------------
Total from investment operations .53 .90 .56 .91 .21
--------------------------------------------
Distributions from net
investment income (.55) (.58) (.61) (.63) (.61)
In excess of net investment income (.01) (.01) - - -
Distributions from net
realized gains (.01) (.14) - - -
--------------------------------------------
Total distributions (.57) (.73) (.61) (.63) (.61)
--------------------------------------------
Net asset value, end of year 10.52 10.56 10.39 10.44 10.16
============================================
Total return (%) 2 5.11 8.90 5.53 9.15 2.22
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 758,942 713,141 658,339 639,847 587,366
Ratios to average net assets: (%)
Expenses .65 .65 .64 .64 .63
Net investment income 5.17 5.49 5.84 5.96 6.15
Portfolio turnover rate (%) 11.11 12.74 22.24 9.71 12.91
CLASS C
- ------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 10.61 10.43 10.47 10.17
------------------------------------
Net investment income .49 .52 .55 .47
Net realized and unrealized
gains (losses) (.03) .33 (.05) .30
------------------------------------
Total from investment operations .46 .85 .50 .77
------------------------------------
Distributions from net
investment income (.49) 3 (.53) (.54) (.47)
Distributions from net
realized gains (.01) (.14) - -
------------------------------------
Total distributions (.50) (.67) (.54) (.47)
------------------------------------
Net asset value, end of year 10.57 10.61 10.43 10.47
====================================
Total return (%) 2 4.50 8.35 4.98 7.71
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 41,917 25,899 11,935 3,110
Ratios to average net assets: (%)
Expenses 1.21 1.21 1.21 1.22 4
Net investment income 4.61 4.89 5.22 5.36 4
Portfolio turnover rate (%) 11.11 12.74 22.24 9.71
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
3. Includes distributions in excess of net investment income in the amount of
$.004.
4. Annualized.
PUERTO RICO FUND
CLASS A YEAR ENDED FEBRUARY 28,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.86 11.51 11.59 11.31 11.83
--------------------------------------------
Net investment income .60 .62 .65 .66 .67
Net realized and unrealized
gains (losses) .06 .36 .02 .30 (.50)
--------------------------------------------
Total from investment operations .66 .98 .67 .96 .17
--------------------------------------------
Distributions from net
investment income (.60) 3 (.62) (.65)3 (.67) 2 (.69)
Distributions from net
realized gains (.04) (.01) (.10) (.01) -
--------------------------------------------
Total distributions (.64) (.63) (.75) (.68) (.69)
--------------------------------------------
Net asset value, end of year 11.88 11.86 11.51 11.59 11.31
============================================
Total return (%) 4 5.68 8.78 6.03 8.68 1.60
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 218,753 210,325 192,525 190,577 176,888
Ratios to average net assets: (%)
Expenses .74 .75 .73 .74 .73
Net investment income 4.98 5.35 5.62 5.71 5.95
Portfolio turnover rate (%) 20.19 7.94 21.09 27.99 18.30
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.87 11.53 11.62 11.32
------------------------------------
Net investment income .53 .56 .58 .50
Net realized and unrealized gains .06 .34 .02 .30
------------------------------------
Total from investment operations .59 .90 .60 .80
------------------------------------
Distributions from net
investment income (.53) 5 (.55) (.59) (.49)
Distributions from net
realized gains (.04) (.01) (.10) (.01)
------------------------------------
Total distributions (.57) (.56) (.69) (.50)
------------------------------------
Net asset value, end of year 11.89 11.87 11.53 11.62
====================================
Total return (%) 4 5.09 8.07 5.33 7.21
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 7,050 3,615 1,679 533
Ratios to average net assets: (%)
Expenses 1.30 1.31 1.30 1.32 6
Net investment income 4.43 4.78 5.04 5.16 6
Portfolio turnover rate (%) 20.19 7.94 21.09 27.99
1. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Includes distributions in excess of net investment income in the amount of
$.006.
4. Total return does not include sales charges, and is not annualized. Before
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
5. Includes distributions in excess of net investment income in the amount of
$.004.
6. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] 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. Your investment representative
can help you decide.
CLASS C
CLASS B (ALL FUNDS EXCEPT
CLASS A (HIGH YIELD FUND ONLY) FEDERAL INTER-
MEDIATE, INDIANA AND
MICHIGAN)
- --------------------------------------------------------------------------------
o Initial sales charge of o No initial sales charge o Initial sales charge
2.25% of less (Federal of 1%
Intermediate Fund) or
4.25% or less (all
other funds)
o Deferred sales charge o Deferred sales charge o Deferred sales charge
of 1% on purchases of of 4% or less on of 1% on shares you
$1 million or more sold shares you sell within sell within 18 months
within 12 months six years
o Lower annual expenses o Higher annual expenses o Higher annual
than Class B or C due than Class A (same as expenses than Class A
to lower distribution Class C) due to higher (same as Class B) due
fees distribution fees. to higher
Automatic conversion distribution fees. No
to Class A shares conversion to Class A
after eight years, shares, so annual
reducing future annual expenses do not
expenses. decrease.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE HIGH YIELD FUND BEGAN OFFERING CLASS B
SHARES ON JANUARY 1, 1999.
<TABLE>
<CAPTION>
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- ---------------------------------------------------------------------------------------------
All funds (except Federal Intermediate)
<S> <C> <C>
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
FEDERAL INTERMEDIATE FUND
- -------------------------
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 47), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page 46). The CDSC will not apply to
purchases over $250 million in the High Yield Fund.
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.15% per year for the Michigan Fund (although the fund is currently only
reimbursing up to 0.10%), and 10% per year for the remaining funds, to those who
sell and distribute Class A shares and provide other services to shareholders.
Because these fees are paid out of Class A's assets on an on-going basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
SALES CHARGES - CLASS B (HIGH YIELD FUND ONLY)
IF YOU SELL YOUR SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- -------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page 46). After
8 years, your Class B shares automatically convert to Class A shares, lowering
your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
<TABLE>
<CAPTION>
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- -------------------------------------------------------------------------------------
<S> <C> <C>
Under $1 million 1.00 1.01
</TABLE>
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE IS
NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) -
CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 51
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. The CDSC for each
class also may be waived for certain redemptions and distributions. If you would
like information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. A list of
available sales charge waivers also may be found in the Statement of Additional
Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
<TABLE>
<CAPTION>
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $1,000 $50
UGMA/UTMA accounts $100 $50
Broker-dealer sponsored wrap account programs $250 $50
Full-time employees, officers, trustees and directors of $100 $50
Franklin Templeton entities, and their immediate family members
</TABLE>
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] representative representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] to the fund. to the fund. Include
your account number on
BY MAIL Mail the check and your the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note to
Investor Services.
- --------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE
Wire the funds and mail To make a same day wire
1-800/632-2301 your signed application investment, please call
(or 1-650/312-2000 to Investor Services. us by 1:00 p.m. pacific
collect) Please include the wire time and make sure your
control number or your wire arrives by 3:00 p.m.
new account number on the
application.
To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] send signed written below or our automated
instructions. The TeleFACTS system, or
BY EXCHANGE TeleFACTS system cannot send signed written
be used to open a new instructions.
TeleFACTS(R) account.
1-800/247-1753 (Please see page 51 for
(around-the-clock (Please see page 51 for information on
access) information on exchanges.) exchanges.)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with handset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a fund by automatically transferring money from your checking or savings account
each month to buy shares. The minimum investment to open an account with an
automatic investment plan is $50. To sign up, complete the appropriate section
of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class A
shares of a fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class A without any sales charge. Advisor Class shareholders of another
Franklin Templeton Fund also may exchange into Class A without any sales charge.
Advisor Class shareholders who exchange their shares for Class A shares and
later decide they would like to exchange into another fund that offers Advisor
Class may do so.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
56).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
SELLING SHARES
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic of hands shaking] Contact your investment representative
Through your investment
representative
- --------------------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
By Mail to Investor Services. Corporate, partnership
or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise
we will sell your Class A shares first. Be
sure to include all necessary signatures and
any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
- --------------------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000
or less, you do not hold share certificates
By Phone and you have not changed your address by
phone within the last 15 days, you can sell
1-800/632-2301 your shares by phone.
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- --------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
By Wire selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information on
file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- --------------------------------------------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the fund you
pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
By Exchange or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates its net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds' financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds do not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (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, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS B
ALL FUNDS (HIGH YIELD
(EXCEPT FEDERAL INTERMEDIATE) CLASS A FUND ONLY) CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) - 3.00 2.00
Investment under $100,000 4.00 - -
$100,000 but under $250,000 3.25 - -
$250,000 but under $500,000 2.25 - -
$500,000 but under $1 million 1.85 - -
$1 million or more up to 0.75 1 - -
12B-1 FEE TO DEALER 0.10 0.15 2 0.65 3
FEDERAL INTERMEDIATE FUND
- -------------------------
COMMISSION (%) -
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating in
comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file # 811-4149 TF3 P 07/99
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, 1999
[INSERT FRANKLIN TEMPLETON BEN HEAD]
P.O. BOX 997151, SACRAMENTO, CA95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated July 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
funds. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended February 28, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ....................2
Risks ...................................7
Officers and Trustees ..................10
Management and Other Services ..........13
Portfolio Transactions .................14
Distributions and Taxes ................14
Organization, Voting Rights
and Principal Holders .................16
Buying and Selling Shares ..............17
Pricing Shares .........................22
The Underwriter ........................23
Performance ............................25
Miscellaneous Information ..............28
Description of Ratings .................29
State Tax Treatment ....................31
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
Each fund's investment goal 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 exempt from personal
income taxes, if any, for resident shareholders of the fund's state. These
goals are fundamental, which means they may not be changed without
shareholder approval. Of course, there is no assurance that any fund will
meet its goal.
As fundamental policies, each fund normally invests at least 80% of its net
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax and, in the case of each state
fund, at least 80% of its net assets in securities that pay interest free
from the personal income taxes, if any, of its state. As a nonfundamental
policy, each state fund also normally invests at least 65% of its total
assets in municipal securities of its state. Unlike the state funds, 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.
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, generally pay interest free from federal income tax and
from state personal income taxes, if any, for residents of the fund's state.
Each fund tries 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
also may invest, if consistent with its investment goals 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.
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 top rated
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. While this feature helps protect against a decline in
the security's market price when interest rates go up, it lowers the fund's
income when interest rates fall. 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 one to 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. Each fund generally uses variable or floating rate
securities as short-term investments while waiting for long-term investment
opportunities.
MUNICIPAL LEASE OBLIGATIONS Each fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally 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
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, 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.
The board of trustees reviews each fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board. These factors may 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.
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 may receive
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. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
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. A call of some or all of these securities may lower a fund's income
and its distributions to shareholders. 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 the 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.
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.
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. Each fund may invest in taxable commercial paper
only for temporary defensive purposes.
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 the 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 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. Generally, to meet federal tax
requirements at the close of each quarter, a fund may not invest more than
25% of its total assets in any one issuer and, with respect to 50% of total
assets, may not invest more than 5% of its total assets in any one issuer.
These limitations do not apply to U.S. government securities and may be
revised if applicable federal income tax requirements are revised.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, including the
unavailability of securities that meet a fund's investment criteria, it may
invest each 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 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. Each fund also may
invest all of its assets in municipal securities issued by a U.S. territory
such as Guam, Puerto Rico or the Mariana Islands.
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.
CREDIT 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 Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (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.
These ratings are described at the end of this SAI under "Description of
Ratings."
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 guarantees 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.
As discussed in the prospectus, each fund has limitations on the credit
quality of the securities it may buy. These limitations are generally applied
when a fund makes an investment so that a fund is not required to sell a
security because of a later change in circumstances.
INSURANCE Each fund invests primarily in insured municipal securities.
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 guarantees 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 distributions.
TYPES OF INSURANCE. There are three types of insurance: new issue, secondary
and portfolio. A new issue insurance policy is purchased by the issuer when
the security is issued. A secondary insurance policy may be purchased by the
fund after a security is issued. With both new issue and secondary policies,
the insurance continues in force for the life of the security and, thus, may
increase the credit rating of the security, as well as its resale value.
Each fund may buy a secondary insurance policy at any time, if the manager
believes the insurance would be in the best interest of the fund. A fund is
likely to buy a secondary insurance policy if, in the manager's opinion, the
fund could sell a security at a price that exceeds the current value of the
security, without insurance, plus the cost of the insurance. The purchase of
a secondary policy, if available, may enable the fund to sell a defaulted
security at a price similar to that of comparable securities that are not in
default. The fund would value a defaulted security covered by a secondary
insurance policy at its market value.
Each fund also may buy a portfolio insurance policy. Unlike new issue and
secondary insurance, which continue in force for the life of the security,
portfolio insurance only covers securities while they are held by the fund.
If the fund sells a security covered by portfolio insurance, the insurance
protection on that security ends and, thus, cannot affect the resale value of
the security. As a result, the fund may continue to hold any security insured
under a portfolio insurance policy that is in default or in significant risk
of default and, absent any unusual or unforeseen circumstances as a result of
the portfolio insurance policy, would likely value the defaulted security, or
security for which there is a significant risk of default, at the same price
as comparable securities 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 insurance premium the fund pays for a portfolio insurance policy is a
fund expense. The premium is payable monthly and is adjusted for purchases
and sales of covered securities during the month. If the fund fails to pay
its premium, the insurer may take action against the fund to recover any
premium payments that are 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.
QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any
one of several qualified municipal bond insurers. Each fund generally 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. Currently, there are four primary,
triple A rated municipal bond insurers. Each fund, however, may invest a
portion of its assets in insured municipal securities covered by policies
issued by insurers with a rating below tripe A or its equivalent.
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 the manager 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.
If an insurer is called upon to pay the principal or interest on an insured
security that is due for payment but that has not been paid by the issuer,
the terms of payment would be governed by the provisions of the insurance
policy. After payment, 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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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 manager own beneficially more
than one-half 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 Investment
Company Act of 1940, 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 Franklin Advisers, Inc. or its affiliates.
11. In the case of the Arizona and Florida Funds, purchase securities, in
private placements or in other transactions, for which there are legal or
contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any industry;
although for purposes of this limitation, tax-exempt securities and U.S.
government obligations are not considered to be part of any industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the 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.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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STATE 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 and
is subject to change. The information below is based on data available to the
funds from 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. Strong overall employment growth, affordable housing, and an
attractive climate have helped Arizona's population grow at a rate four times
faster than the national rate during the 1990s. Although population growth is
expected to remain strong in the near term, the rate of growth has slowed
since 1996 as a result of California's economic recovery and thus less
migration from that state. Competitive wage rates, low energy costs,
corporate tax reductions and an abundance of land also have helped to attract
businesses to the state. As a result, Arizona's unemployment in 1998 was at
its lowest level since the early 1970s.
Arizona's economy has continued to diversify, especially in the manufacturing
and services areas. As of August 1998, manufacturing accounted for
approximately 10.5% of the state's total employment, trade 24.3%, services
30.4%, government 16.1%, and construction 6.6%. Farming and mining accounted
for less than 2% of the total workforce. Improved diversification may help
reduce the state's economic vulnerability that in the past resulted from
Arizona's historical dependence on its farming, mining and real estate
industries. Arizona may be vulnerable, however, to events affecting
high-technology products and to recent and future economic problems in Asia.
Approximately 80% of the state's exports have been in the area of
high-technology products and Asian exports have supported at least 100,000
jobs in the state.
Under its constitution, Arizona cannot issue general obligation debt. Thus,
gross state debt levels have remained moderate. The state historically has
relied on lease obligations, revenue bonds, and pay-as-you-go financing for
its capital needs.
Arizona's strong economic growth and higher-than-anticipated tax revenues
have allowed the state to post four consecutive operating surpluses and
general fund balance increases. Preliminary 1998 results show another
operating surplus. During fiscal 1999, however, a reduction in the general
fund balance is expected with the implementation of new school capital
funding legislation.
FLORIDA. Florida's population has grown rapidly in recent years, with the
fastest growth among 5-17 year-olds and seniors 65 and over. The rapid growth
among these age groups has required increased expenditures for services such
as schools and health care and has placed sustained pressure on the state's
budget for the funding of these services. As a result, Florida is more
vulnerable to increases in the cost of education, Medicaid and other health
care services than many other states. While the population of the young and
old has grown rapidly, the working age population has grown at a much slower
rate and is expected to decline in the coming years.
Because of its substantial retirement age population, investment income and
transfer payments, such as social security and pension benefits, made up more
than 44% of Florida's income distribution in 1997. Wages and salaries were
more than 49%. This income mix historically has led to relatively stable
personal income levels across different economic cycles, although it also has
created some vulnerability to changes in the consumer price index at the
federal level.
Florida's tax base has been relatively narrow, with no personal income tax
and 60% of its revenues derived from the state's sales and use tax. This
reliance on a cyclical revenue source has created some vulnerability to
recession and slower growth in the tax base. Recent trends also have shown an
increase in internet and mail order sales, which the state has not been able
to tax. If this trend continues, states that rely on sales taxes, like
Florida, could be adversely affected. To help provide some protection against
the historically volatile nature of the sales tax, Florida enacted a
constitutional amendment creating a budget stabilization fund. As of March
1999, Florida projected a balance in the fund of $787 million by the end of
fiscal 1999.
Over the past five years, Florida's debt burden has grown dramatically with
the increased need for schools and health care, as well as environmental
protection programs designed to help protect the state's important tourism
industry. The state's rapidly growing population should continue to place
demands on the state's budget and debt burden to finance infrastructure and
other improvements.
While tourism has remained Florida's most important industry, Florida's
economy has continued to diversify from a narrow base of agriculture and
seasonal tourism into a service and trade economy. Job growth has been
steady, slightly higher than the national average, and unemployment has been
around the national rate. Because of its location, much of the state's export
sector has relied on exports to Latin America. Although exports have
comprised a relatively small part of the gross state product, the sector's
dependence on Latin America poses a risk in the event of economic instability
in that region.
MASSACHUSETTS. In recent years, Massachusetts' economy has been strong and
has led the northeast region. Since 1996, total employment gains in the
commonwealth have exceeded national levels. Likewise, the commonwealth's
unemployment rates have compared favorably with national rates. In June 1998,
the unemployment rate in Massachusetts was 3.4%, compared to the national
rate of 4.5%. Employment growth of 3% in 1998, together with low unemployment
rates and modest population growth, have begun to cause some concerns of a
tight labor market. A labor shortage may be a potential constraint on the
further growth of Massachusetts' economy.
Although the economy has been strong, the commonwealth's 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. Tax cuts, a relatively high unfunded pension
liability, and the substantial reliance of localities on the commonwealth for
financial assistance also may strain the commonwealth's resources and limit
its financial flexibility. With the rate of economic growth expected to slow
in coming years, Massachusetts' biggest challenge is likely to be the long
term management of its capital and debt plans.
MICHIGAN. While Michigan's economy has diversified to some degree, it has
remained dependent on its durable goods manufacturing sector, especially on
its cyclical auto industry. In recent years, manufacturing has accounted for
22% of the state's employment and 33% of personal income. While this sector
has been strong since the end of the national recession in the early 1990s
and has made improvements that could potentially lessen its historical
volatility, the state's reliance on manufacturing has made its economy
potentially more volatile than the economies of more diverse states and more
susceptible to the adverse effects of another recession.
Since 1992, Michigan's economy has grown at a healthy pace. Unemployment
levels have been below national levels since 1994 and, through September
1998, employment levels were at an all-time high. With the help of its strong
economy, Michigan's finances also have improved. 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 at more
than $1 billion at September 30, 1998. Michigan may need the increased
stability these reserve levels provide to offset higher school funding
requirements. The state also has been able to maintain its traditionally low
debt levels, although contingent debt levels issued through school programs
and based on the state's credit have grown rapidly, approaching levels almost
double the state's outstanding direct debt. The state's contingent debt
exposure will need to be carefully managed in the coming years to help
maintain the state's financial stability.
MINNESOTA. Minnesota's economy has been well diversified, with only some
concentration in the manufacturing sector. Historically, 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, especially in
the services 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.
Strong financial management, healthy reserve levels and a moderate debt
burden have allowed the state to maintain its strong credit rating. With the
recent strength of its economy and growth in revenues, Minnesota has
increased its general fund balance to $2.4 billion as of June 30, 1998, with
a budgetary reserve of $1.4 billion. With its balances and reserves at
historic levels, several tax cuts have been proposed.
OHIO. Ohio's financial performance has been 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, improving 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 September 1998, job growth was 1.2%, compared to
2.4% for the nation. Much of this growth has been concentrated in the
services and construction sectors. Unemployment was 4.3% in September 1998,
slightly below the national rate. The state's population growth also has been
slow and, during 1997, was the slowest in the Great Lakes region.
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 has enjoyed large operating surpluses over the last
seven fiscal years, which have allowed the state to restore its reserves to
levels above those before the last recession. A recent court decision
requiring major changes to the state's school funding programs, however, may
create some pressure on the state's ability to maintain a balanced budget,
especially in the event of an economic slowdown.
U.S. TERRITORIES Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, the ability of municipal
issuers in U.S. territories to continue to make principal and interest
payments also may 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 funds 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 and is subject
to change. It is based on data available to the funds from historically
reliable sources, but it has not been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on tourism. 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. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.8% in gross island product between
1997 and 1998.
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. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
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 also may 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 May 1999, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and inability to meet 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.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico also will need to address its large
unfunded pension liability of more than $6 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
Internal Revenue Code. This 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. Outstanding issues relating to the potential for a transition to
statehood also may have broad implications for Puerto Rico and its financial
and credit position.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
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 27 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 (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 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 (66)
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 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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 (66)
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
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 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (36)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
The trust pays noninterested board members $1,450 per month plus $1,300 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
NAME THE TRUST($) 1 OF FUNDS($) 2 EACH SERVES 3
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Frank H. Abbott, III 25,675 159,051 27
Harris J. Ashton 26,390 361,157 48
S. Joseph Fortunato 25,097 367,835 50
Edith E. Holiday 28,650 211,400 24
Frank W.T. LaHaye 26,975 163,753 27
Gordon S. Macklin 26,390 361,157 48
1. For the fiscal year ended February 28, 1999. During the period from March
1, 1998, through May 31, 1998, fees at the rate of $1,300 per month plus
$1,300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the funds' portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the funds, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage 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 applicable federal securities laws, 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 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.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of its net assets up to and including $100
million; and
o 1/24 of 1% of the value of its net assets over $100 million up to and
including $250 million; and
o 9/240 of 1% of the value of its net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended February 28, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
-------------------------
1999 1998 1997
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Arizona Fun 1 129,625 53,600 9,209
Florida Fund 2 279,543 164,237 126,611
Insured Fund 8,186,468 7,894,099 7,848,890
Massachusetts Fund 1,842,232 1,792,766 1,649,833
Michigan Fund 5,623,372 5,414,427 5,284,581
Minnesota Fund 2,591,321 2,465,946 2,439,817
Ohio Fund 3,822,228 3,586,169 3,391,314
1. For the fiscal years ended February 28, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $444,848, $300,020 and $238,269,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
2. For the fiscal years ended February 28, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $697,080, $559,377 and $447,534,
respectively. Under an agreement the manager to limit its fees, the fund paid
the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended February 28, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
----------------------------
1999 1998 1997 1
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Arizona Fund 101,043 70,517 23,726
Florida Fund 169,903 132,554 46,588
Insured Fund 1,895,252 1,847,411 767,504
Massachusetts Fund 506,241 492,589 190,575
Michigan Fund 1,465,757 1,420,284 584,545
Minnesota Fund 730,139 693,518 286,923
Ohio Fund 1,066,391 1,013,556 410,345
1. For the period from October 1, 1996, through February 28, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is each fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will not exceed the per account fee payable
by a fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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Since most purchases by the funds are principal transactions at net prices,
the funds incur little or no brokerage costs. Each fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the funds do not buy securities 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 allows 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, also may 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 funds.
During the fiscal years ended February 28, 1999, 1998 and 1997, the funds did
not pay any brokerage commissions.
As of February 28, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code, the funds have
qualified and continue to qualify to pay exempt-interest dividends to you.
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 to you. 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 also will be exempt from that state's personal income taxes. Most
states generally do not grant tax-free treatment to interest on state and
municipal securities of other states.
The funds 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, or on ordinary income derived
from the sale of market discount bonds. Any fund distributions from such
income will be taxable to you as ordinary income, whether you receive them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year, 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, a fund may designate and distribute to you, as taxable, tax-exempt
or tax preference income, 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.
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
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. 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, a 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires each fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. Each fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. 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 or short-term, generally depending on how long you hold your
shares. 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 fund shares 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 the fund on those shares.
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 If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded 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
consists of interest rather than dividends, no portion of its distributions
generally will 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.
INVESTMENT IN COMPLEX SECURITIES Each fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses. In turn,
these rules may affect the amount, timing or character of the income
distributed to you by a fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while still exempt from regular federal income tax, is a
preference item for taxpayers when determining their alternative minimum tax
under the Internal Revenue 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. Persons who are
defined in the Internal Revenue 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 fund shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a series of Franklin Tax-Free Trust, an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Massachusetts business trust in September 1984, and is registered with the
SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that each fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
Each fund, except the Arizona and Florida Funds, currently offers two classes
of shares, Class A and Class C. Before January 1, 1999, Class A shares were
designated Class I and Class C shares were designated Class II. The full
title of each class is:
o Franklin Insured Tax-Free Income Fund - Class A
o Franklin Insured Tax-Free Income Fund - Class C
o Franklin Massachusetts Insured Tax-Free Income Fund - Class A
o Franklin Massachusetts Insured Tax-Free Income Fund - Class C
o Franklin Michigan Insured Tax-Free Income Fund - Class A
o Franklin Michigan Insured Tax-Free Income Fund - Class C
o Franklin Minnesota Insured Tax-Free Income Fund - Class A
o Franklin Minnesota Insured Tax-Free Income Fund - Class C
o Franklin Ohio Insured Tax-Free Income Fund - Class A
o Franklin Ohio Insured Tax-Free Income Fund - Class C
The Arizona and Florida Funds each offer only one share class. Because their
sales charge structures and Rule 12b-1 plans are similar to those of Class A
shares, shares of the Arizona and Florida Funds are considered Class A shares
for redemption, exchange and other purposes.
The funds may offer additional classes of shares in the future.
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
As of April 12, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with a fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, 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, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards 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 in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who chose
to reinvest their distributions in Class A 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 the fund's
Class A shares. This waiver category also applies to Class C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a
Templeton Global Strategy Fund, a new CDSC will apply to your purchase of
fund shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are redeemed
from the money fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts
without a sales charge. The banks may charge service fees to their customers
who participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- -------------------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 rules of the
National Association of Securities Dealers, Inc.
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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges for establishing or maintaining a
systematic withdrawal plan. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
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. The funds 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued. Each fund values
over-the-counter portfolio securities within the range of the most recent
quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, each fund values them
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 NAV 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 NAV.
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.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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 Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
February 28:
AMOUNT
RECEIVED IN
TOTAL AMOUNT CONNECTION WITH
COMMISSIONS RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
- -------------------------------------------------------------------------------
1999
Arizona Fund 477,674 32,175 0
Florida Fund 610,778 42,251 85
Insured Fund 3,799,368 242,769 38,597
Massachusetts Fund 1,115,229 66,155 24,083
Michigan Fund 2,630,865 163,572 10,821
Minnesota Fund 1,378,166 80,608 6,400
Ohio Fund 2,308,355 146,830 15,696
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
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.15% per year for the Florida and Arizona Funds, and 0.10% per year for the
remaining funds, of Class A's average daily net assets, payable quarterly.
All distribution expenses over this amount will be borne by those who have
incurred them.
In implementing the Class A plan of each fund, except the Arizona and Florida
Funds, the board has determined that the annual fees payable under the plan
will be equal to the sum of: (i) the amount obtained by multiplying 0.10% by
the average daily net assets represented by the fund's Class A shares 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 the fund's Class A shares 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 is 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 A expense. This means that all Class A 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 A and, as Class A shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class A shares purchased on or after May 1, 1994, increases in relation to
outstanding Class A shares, the expenses attributable to payments under the
plan also will 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 A plan, the plan permits the board to allow the fund to pay a
full 0.10% on all assets at any time. The approval of the board would be
required to change the calculation of the payments to be made under the Class
A plan.
The Class A plan for each fund, except the Arizona and Florida Funds, does
not permit unreimbursed expenses incurred in a particular year to be carried
over to or reimbursed in later years.
THE CLASS C PLAN. Under the Class C plan, each fund pays Distributors up to
0.50% per year of the class's average daily net assets, payable quarterly, to
pay Distributors or others for providing distribution and related services
and bearing certain expenses. All distribution expenses over this amount will
be borne by those who have incurred them. The fund also may pay a servicing
fee of up to 0.15% per year of the class's average daily net assets, payable
quarterly. 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 expenses relating to the Class C plan also are used to pay Distributors
for advancing the commission costs to securities dealers with respect to the
initial sale of Class C shares.
THE CLASS A AND C 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
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 Arizona
and Florida plans also may be terminated by any act that constitutes an
assignment of the underwriting agreement with Distributors. Distributors or
any dealer or other firm also may 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 noninterested board members, 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, 1999, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the funds paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY
EXPENSES ($) THE FUND ($)
- -------------------------------------------------------------
Arizona Fund 125,733 65,600
Florida Fund 199,058 111,406
Insured Fund - Class A 1,677,988 1,462,142
Insured Fund - Class C 576,359 317,040
Massachusetts Fund - Class A 394,624 296,290
Massachusetts Fund - Class C 226,351 119,178
Michigan Fund - Class A 1,202,034 1,012,546
Michigan Fund - Class C 409,772 260,992
Minnesota Fund - Class A 559,945 438,850
Minnesota Fund - Class C 156,706 94,930
Ohio Fund - Class A 799,316 673,157
Ohio Fund - Class C 339,665 222,379
PERFORMANCE
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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. Performance figures reflect Rule 12b-1 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.
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 initial 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the funds.
The average annual total returns for the indicated periods ended February 28,
1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
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CLASS A
Arizona Fund 4/30/93 1.24 5.67 - 5.91
Florida Fund 4/30/93 1.54 5.46 - 5.38
Insured Fund 4/03/85 1.20 4.95 7.11 7.97
Massachusetts Fund 4/03/85 0.89 4.91 6.89 7.30
Michigan Fund 4/03/85 1.73 5.11 7.08 7.68
Minnesota Fund 4/03/85 0.71 4.57 6.61 7.56
Ohio Fund 4/03/85 1.17 4.98 7.03 7.67
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
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CLASS C
Insured Fund 3.04 6.09
Massachusetts Fund 2.70 6.04
Michigan Fund 3.70 6.36
Minnesota Fund 2.57 5.53
Ohio Fund 3.03 6.25
The following SEC formula was used to calculate these figures:
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 initial 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 returns for the
indicated periods ended February 28, 1999, were:
SINCE
INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
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CLASS A
Arizona Fund 4/30/93 1.24 31.74 - 39.80
Florida Fund 4/30/93 1.54 30.47 - 35.74
Insured Fund 4/03/85 1.20 27.30 98.82 190.59
Massachusetts Fund4/03/85 0.89 27.11 94.66 166.24
Michigan Fund 4/03/85 1.73 28.32 98.24 179.98
Minnesota Fund 4/03/85 0.71 25.02 89.61 175.48
Ohio Fund 4/03/85 1.17 27.53 97.28 179.58
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
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CLASS C
Insured Fund 3.04 25.42
Massachusetts Fund 2.70 25.20
Michigan Fund 3.70 26.63
Minnesota Fund 2.57 22.92
Ohio Fund 3.03 26.12
CURRENT YIELD Current yield shows the income per share earned by a fund. It
is calculated by dividing the net investment income per share 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 yields for the 30-day period ended February 28, 1999, were:
CLASS A (%) CLASS C (%)
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Arizona Fund 3.81 -
Florida Fund 3.79 -
Insured Fund 3.83 3.38
Massachusetts Fund 3.75 3.33
Michigan Fund 3.71 3.28
Minnesota Fund 3.83 3.41
Ohio Fund 3.84 3.42
The following SEC formula was used to calculate these figures:
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 Each fund also may quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by
dividing the portion of the 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 yield that is not tax-exempt, if any. The
taxable-equivalent yields for the 30-day period ended February 28, 1999, were:
CLASS A (%) CLASS C (%)
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Arizona Fund 6.64 -
Florida Fund 6.27 -
Insured Fund 6.34 5.60
Massachusetts Fund 6.60 5.86
Michigan Fund 6.43 5.68
Minnesota Fund 6.93 6.17
Ohio Fund 6.82 6.08
As of February 28, 1999, the federal or combined federal and state income tax
rate upon which the taxable-equivalent yield quotations were based were as
follows:
COMBINED RATE (%)
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Arizona Fund 42.6
Florida Fund 39.6
Insured Fund 39.6
Massachusetts Fund 43.2
Michigan Fund 42.3
Minnesota Fund 44.7
Ohio Fund 43.7
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, if any, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended February 28,
1999, were:
CLASS A (%) CLASS C (%)
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Arizona Fund 4.45 -
Florida Fund 4.47 -
Insured Fund 4.78 4.31
Massachusetts Fund 4.66 4.22
Michigan Fund 4.63 4.15
Minnesota Fund 4.73 4.31
Ohio Fund 4.69 4.26
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day period ended February 28, 1999, were:
CLASS A (%) CLASS C (%)
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Arizona Fund 7.76 -
Florida Fund 7.40 -
Insured Fund 7.91 7.14
Massachusetts Fund 8.20 7.43
Michigan Fund 8.02 7.19
Minnesota Fund 8.56 7.80
Ohio Fund 8.33 7.57
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 Each fund also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
o 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.
o Financial publications: The Wall Street Journal, and Business Week,
Financial World, Forbes, Fortune, and Money magazines - provide performance
statistics over specified time periods.
o 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.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for each fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by each fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of 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 any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue its performance
as compared to these other averages.
MISCELLANEOUS INFORMATION
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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 the funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, 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 $217 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 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 $51 billion in municipal security 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
June 30, 1998.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1999, 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 1999). 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 also may 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 municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the funds and their shareholders to be Year 2000 compliant.
After completing these modifications, comprehensive tests are conducted in
one of Resources' U.S. test labs to verify their effectiveness. Resources
continues to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
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MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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. These 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 that are speculative to a
high degree. These 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 that
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.
STANDARD & POOR'S CORPORATION (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 these bonds will likely have some quality and
protective characteristics, they 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 INVESTORS SERVICE, INC. (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 that 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 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. Business and financial alternatives can be
identified, however, that 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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, 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 for both short-term debt and commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect 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
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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 Sections 43-1021(4) and 43-1121(3) of the Arizona Income Tax Code
state 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.
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 exempt 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 previous 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) also will 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 tax. The remaining net asset value (and corresponding
value of fund shares) 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,
also are 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.
Capital gain dividends attributable to obligations other than of the
Commonwealth of Massachusetts, or any political subdivision, agency or
instrumentality thereof 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 ranging from five
percent to two percent based upon the applicable holding period of the asset
as determined under Massachusetts law. By the 2001 tax year, these reduced
rates will range from five percent to zero percent.
In determining the Massachusetts excise tax on corporations subject to state
taxation, distributions from the fund generally will 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
also may 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.
Any distributions of net short-term and net long-term capital gains earned by
the fund generally will 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.
MINNESOTA Section 290.01 of the Code of Minnesota states that individual
shareholders generally will 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), also will be exempt from Minnesota's
personal income tax. As a matter of policy, the fund will continue to seek to
earn at least 95% of its income from interest on Minnesota obligations and
less than 5% from direct U.S. government, Puerto Rico or other obligations to
try 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.
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 income attributable to obligations of the U.S., its
territories and possessions by regulated investment companies, such as the
Ohio Fund, also will be exempt from the Ohio personal income tax and the Ohio
corporation franchise tax computed on the net income basis. In addition,
distributions made by the Ohio Fund that are attributable to interest
payments on obligations issued by or on behalf of the state of Ohio, its
political subdivisions or agencies or instrumentalities or its political
subdivisions will be exempt from Ohio personal income tax provided that at
all times at least 50 percent of the value of the total assets of the Ohio
Fund consists of Ohio obligations, or similar obligations of other states or
their subdivisions. 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.
Shareholders who are subject to the Ohio personal income tax or the Ohio
corporation franchise tax computed on the net income basis will not be
subject to such taxes on distributions of "capital gain dividends" to the
extent that such distributions are attributable to profit made on the sale,
exchange or other disposition by the Ohio Fund of exempt obligations of the
state of Ohio and its subdivisions and authorities.
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
[INSERT FRANKLIN TEMPLETON BEN HEAD]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
JULY 1, 1999
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated July 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
funds. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended February 28, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ........................... 2
Risks .......................................... 6
Officers and Trustees .......................... 10
Management and Other Services .................. 12
Portfolio Transactions ......................... 14
Distributions and Taxes ........................ 14
Organization, Voting Rights
and Principal Holders ......................... 16
Buying and Selling Shares ...................... 17
Pricing Shares ................................. 22
The Underwriter ................................ 22
Performance .................................... 25
Miscellaneous Information ...................... 28
Description of Ratings ......................... 29
State Tax Treatment ............................ 31
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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GOALS AND STRATEGIES
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Each fund's investment goal 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 exempt from personal income
taxes, if any, for resident shareholders of the fund's state. These goals are
fundamental, which means they may not be changed without shareholder
approval. Of course, there is no assurance that any fund will meet its goal.
As fundamental policies, each fund normally invests at least 80% of its net
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax, and at least 80% of its net
assets in securities that pay interest free from the personal income taxes,
if any, of its state. As a nonfundamental policy, each fund also normally
invests at least 65% of its total assets in municipal securities of its state.
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, generally pay interest free from federal income tax and
from state personal income taxes, if any, for residents of the fund's state.
Each fund tries 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
also may 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.
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. While this feature helps protect against a decline in the security's
market price when interest rates go up, it lowers the fund's income when
interest rates fall. 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 one to 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. Each fund generally uses variable or floating rate securities as
short-term investments while waiting for long-term investment opportunities.
MUNICIPAL LEASE OBLIGATIONS Each fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally 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
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, 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.
The board of trustees reviews each fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board. These factors may 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.
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 may receive
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. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
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. A call of some or all of these securities may lower a fund's income
and its distributions to shareholders. 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 the 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.
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.
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. Each fund may invest in taxable commercial paper
only for temporary defensive purposes.
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 the 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 the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its net asset value. The funds believe 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. Generally, to meet federal tax
requirements at the close of each quarter, a fund may not invest more than
25% of its total assets in any one issuer and, with respect to 50% of total
assets, may not invest more than 5% of its total assets in any one issuer.
These limitations do not apply to U.S. government securities and may be
revised if applicable federal income tax requirements are revised.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, including the
unavailability of securities that meet a fund's investment criteria, it may
invest each 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) municipal securities issued by a state or local
government other than the fund's state. Each fund also may invest all of its
assets in municipal securities issued by a U.S. territory such as Guam,
Puerto Rico or the Mariana Islands.
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.
CREDIT 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 Investors Service
Inc. (Fitch), Moody's Investors Service, Inc. (Moody's), and Standard &
Poor's Corporation (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. 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 at the end of this SAI
under "Description
of Ratings."
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 guarantees 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.
As discussed in the prospectus, each fund has limitations on the credit
quality of the securities it may buy. These limitations are generally applied
when a fund makes an investment so that a fund is not required to sell a
security because of a later change in circumstances.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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 manager own beneficially more
than one-half 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 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) 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the 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.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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STATE 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 and
is subject to change. The information below is based on data available to the
funds from 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. Nonetheless, Alabama's economic growth
and personal income levels have continued to lag national and regional
averages.
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. Although the state's
substantial funding requirements for its school systems may put some pressure
on its budget and financial operations, overall both Moody's and S&P recently
considered the state's financial outlook to be stable.
FLORIDA. Florida's population has grown rapidly in recent years, with the
fastest growth among 5-17 year-olds and seniors 65 and over. The rapid growth
among these age groups has required increased expenditures for services such
as schools and health care and has placed sustained pressure on the state's
budget for the funding of these services. As a result, Florida is more
vulnerable to increases in the cost of education, Medicaid and other health
care services than many other states. While the population of the young and
old has grown rapidly, the working age population has grown at a much slower
rate and is expected to decline in the coming years.
Because of its substantial retirement age population, investment income and
transfer payments, such as social security and pension benefits, made up more
than 44% of Florida's income distribution in 1997. Wages and salaries were
more than 49%. This income mix historically has led to relatively stable
personal income levels across different economic cycles, although it also has
created some vulnerability to changes in the consumer price index at the
federal level.
Florida's tax base has been relatively narrow, with no personal income tax
and 60% of its revenues derived from the state's sales and use tax. This
reliance on a cyclical revenue source has created some vulnerability to
recession and slower growth in the tax base. Recent trends also have shown an
increase in internet and mail order sales, which the state has not been able
to tax. If this trend continues, states that rely on sales taxes, like
Florida, could be adversely affected. To help provide some protection against
the historically volatile nature of the sales tax, Florida enacted a
constitutional amendment creating a budget stabilization fund. As of March
1999, Florida projected a balance in the fund of $787 million by the end
of fiscal 1999.
Over the past five years, Florida's debt burden has grown dramatically with
the increased need for schools and health care, as well as environmental
protection programs designed to help protect the state's important tourism
industry. The state's rapidly growing population should continue to place
demands on the state's budget and debt burden to finance infrastructure and
other improvements.
While tourism has remained Florida's most important industry, Florida's
economy has continued to diversify from a narrow base of agriculture and
seasonal tourism into a service and trade economy. Job growth has been
steady, slightly higher than the national average, and unemployment has been
around the national rate. Because of its location, much of the state's export
sector has relied on exports to Latin America. Although exports have
comprised a relatively small part of the gross state product, the sector's
dependence on Latin America poses a risk in the event of economic instability
in that region.
GEORGIA. Georgia has been among the fastest growing states in the U.S. in
population, which has helped fuel employment growth and provide low-cost
labor for economic growth. Its diversified economy has performed well in
recent years, with growth in the services and trade sectors 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 doing
business, extensive transportation infrastructure, low unemployment rates,
availability of land and water, and its central location. Atlanta, which has
been at the heart of the state's economic growth, has 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 four fiscal years from 1995 to 1998, and also
has fully funded its reserves. While changes to the state's tax laws are
expected to reduce tax revenues by more than $200 million in fiscal 1999, as
of November 1998 it was not anticipated that these changes would have an
adverse effect on the state's overall financial position.
KENTUCKY. Kentucky's economy has performed at or above national levels in
both employment and personal income growth over the past several years. Its
economy has been moving towards a more modern manufacturing and
service-oriented base, with less emphasis on its traditionally low-wage coal,
tobacco, and apparel industries. Its central location and low cost structure
have helped the state's overall economic growth and have led to seven
consecutive years of net in-migration to the state. The state's per capita
personal income levels, however, have remained consistently below the
national average.
Since fiscal 1993, Kentucky's financial management has steadily improved.
Results for fiscal 1998 were positive, with a general fund balance of $428
million. This was the fifth consecutive year of positive financial results
for the state, due in part to the state's economic growth and a strong record
of spending controls. The state's debt ratios, while declining, have remained
high relative to other states. The 1998-2000 budget emphasizes spending for
education, economic development and tax cuts and incentives to help further
job growth and capital investments.
LOUISIANA. Louisiana's economy has been historically cyclical due to its
reliance on oil and gas production and petro-chemical products. The state has
made some improvements towards a more diversified economy, however, with
strong growth in its service sector, especially in healthcare and tourism
services. Nonetheless, much of the state's recent economic growth has come
from the upturn in the oil and gas sector. Gaming and construction have also
contributed. Future growth could be limited by the state's dependence on the
cyclical oil and gas industry, as well as below average wealth and income
levels.
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 and the oil and gas industry. This
fluctuation has created instability and budget problems in the past. During
the last several years, however, the state's financial position has
stabilized somewhat. The state has had operating surpluses for the past five
fiscal years ended 1997, a trend that, as of April 1998, was expected to
continue for fiscal years 1998 and 1999. Over the past two years, the state
also has made improvements towards controlling costs in its large health care
system, especially Medicaid spending. The state remains vulnerable, however,
to the volatility of its oil and gas industry. Its relatively high debt
burden, unfunded pension liabilities, generally low reserves, and unfunded
risk management claims for judgments against the state, which, as of April
1998, totaled $1.3 billion, could affect the state's performance in future
years.
MARYLAND. Maryland's economic base has been well-diversified. The state's
leading employment and income sectors have been services (33%), trade (24%)
and government (19%). Maryland's dependence on government has been larger
than most other states due to its close proximity to Washington D.C., and has
made Maryland vulnerable to federal budget cuts and downsizing. At the same
time, the state's manufacturing sector (8%) has been smaller than most other
states. Most recently, economic growth has come mainly from the business
services sector. In 1998, job growth outpaced the national average for the
first time in the 1990s.
Maryland's financial performance has been historically strong. Contributing
factors have included high per capita income levels, a well-educated
workforce, an advanced infrastructure, and diversified employment
opportunities. In each of the last five fiscal years, the state has generated
operating surpluses while building its financial reserves. Debt service
levels, while high relative to other states, also have remained manageable.
Going forward, a potential area of financial stress may come from the state's
recent 10% personal income tax reduction, which is to be phased in over five
years. Taking the tax cut into consideration, budget forecasts begin to show
an operating deficit in 2002. The state plans to use its reserves to manage
shortfalls resulting from the tax cut.
MISSOURI. Missouri historically has enjoyed a diversified economy that has
tended to mirror the national economy. Employment and personal income growth,
however, have been at or above the national average. In 1998, 34,000 new jobs
were created in the state, led by government, financial services, insurance,
real estate, service and retail trade sectors, and new businesses were up
55%. Personal income increased by 5.1% in 1998, equal to the national
average. At the same time, the state's unemployment rate of 3.9% was below
the national rate of 4.4%. Foreign exports, however, declined in 1998 for the
first time this decade due to the Asian financial crisis.
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. It has been estimated that the state's
job growth will continue in the near term, 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 in recent years. For fiscal 1999,
increased expenditures for new prison construction, education and further tax
reductions could reduce the state's future financial flexibility.
NORTH CAROLINA. In recent years, North Carolina's economy has experienced
strong growth. From 1994 to 1998, job growth was 3.3%, equal to the national
rate. Below average business costs, a strong durable manufacturing sector,
diverse agriculture, three prestigious universities, and access to ports for
trade and commerce have all contributed to the state's recent economic
strength. The economy has continued to diversify with less emphasis on
textile and apparel manufacturing and more on services, finance and trade,
with strong growth in the high-tech sector. Manufacturing has remained a
significant part of the state's economy, however, and has created some
vulnerability to recession. In 1998, unemployment was a low 3.3%, well below
the national average. The state's
low unemployment rate could create tight labor markets and constrain future
economic growth.
Over the past two years, North Carolina's outstanding debt has doubled due to
new bond issues for highways and schools. Nonetheless, the state's debt
burden has remained among the lowest in the nation. The state also has
continued its recent trend of strong financial performance and conservative
budgeting principles. The state ended fiscal 1998 with a surplus and was able
to increase its reserves. Court ordered tax refunds and the need for
increased school spending may put some pressure on the state's finances and
could result in lower reserves in the near term.
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 increasingly prominent, and, as of March 1999, was second behind
only California in total jobs and advantages in cost of business. The
construction, government and services industries also have experienced strong
growth in recent years due in part to a relatively high rate of net migration
to the state. Overall, Texas has added more than 1.1 million new jobs since
1994.
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. Further defense cutbacks could affect the
state. Changes in the economic and financial stability of Mexico, the state's
chief trade partner, also could adversely affect Texas, its economy and its
financial performance.
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, resulting in a
general fund surplus of $426 million for fiscal 1998. Although the 1998-1999
budget was balanced as of March 1999, the budget includes the use of almost
all of the state's accumulated general fund surplus for property tax relief.
The use of existing surpluses to fund tax cuts could create budget problems
going forward, especially as the state may encounter spending pressures from
its growing population. Since the state does not have a personal income tax,
its reliance on cyclical sales taxes also could result in some budget
instability.
The state's debt burden has been relatively modest. In recent years, however,
the state's debt position has grown. The state also has 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 experienced strong growth in recent years,
especially in the areas of business services, high-technology industries and
retail trade. Growth in these areas has helped to offset federal government
job losses caused by recent federal downsizing and budget cuts. The
commonwealth's unemployment rate has remained one of the nation's lowest,
while personal income levels have continued to exceed the national average.
Historically, Virginia's debt levels have been low, although they have begun
to increase due to some large highway and university construction projects.
Revenues and expenses have likewise grown. Overall, financial results have
been positive with surpluses in four of the past five fiscal years.
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. This
amount was scheduled to be paid in full by fiscal year end 1999. In coming
years, the state also will 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 more
than $2.6 billion.
U.S. TERRITORIES Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, the ability of municipal
issuers in U.S. territories to continue to make principal and interest
payments also may 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 funds 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 and is subject
to change. It is based on data available to the funds from historically
reliable sources, but it has not been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on tourism. 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. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.8% in gross island product between
1997 and 1998.
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. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
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 also may 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 May 20, 1999, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and inability to meet 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.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico also will need to address its large
unfunded pension liability of more than $6 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 Internal Revenue Code. This 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. Outstanding issues relating to
the potential for a transition to statehood also may have broad implications
for Puerto Rico and its financial and credit position.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
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 27 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 (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 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 (66)
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 50 of the investment companies in the Franklin
Templeton Group
of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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 (66)
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
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 49 of the
investment companies in the Franklin Templeton Group
of Funds.
*Rupert H. Johnson, Jr. (58)
77 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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (36)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $1,450 per month plus $1,300 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
NAME THE TRUST 1 OF FUNDS 2 EACH SERVES 3
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Frank H. Abbott, III $25,675 $159,051 27
Harris J. Ashton $26,390 $361,157 48
S. Joseph Fortunato $25,097 $367,835 50
Edith E. Holiday $28,650 $211,400 24
Frank W.T. LaHaye $26,975 $163,753 27
Gordon S. Macklin $26,390 $361,157 48
1. For the fiscal year ended February 28, 1999. During the period from March
1, 1998, through May 31, 1998, fees at the rate of $1,300 per month plus
$1,300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the funds' portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the funds, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage 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 applicable federal securities laws, 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 fund or other funds 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.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of its net assets up to and including $100 million;
and
o 1/24 of 1% of the value of its net assets over $100 million up to and
including $250 million; and
o 9/240 of 1% of the value of its net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended February 28, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
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1999 1998 1997
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Alabama Fund 1,332,672 1,189,527 1,079,285
Florida Fund 8,253,117 7,419,693 6,567,507
Georgia Fund 990,149 872,451 812,505
Kentucky Fund1 143,286 81,200 66,255
Louisiana Fund 908,906 758,170 692,158
Maryland Fund 1,369,242 1,166,952 1,033,178
Missouri Fund 1,860,465 1,574,188 1,416,882
North Carolina Fund 1,834,435 1,566,067 1,410,760
Texas Fund 786,294 770,725 762,188
Virginia Fund 1,958,381 1,689,780 1,519,947
1. For the fiscal years ended February 28, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $377,311, $304,904 and $260,610,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended February 28, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
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1999 1998 1997 1
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Alabama Fund 353,966 315,821 121,584
Florida Fund 1,902,604 1,761,352 691,407
Georgia Fund 257,705 223,366 88,065
Kentucky Fund 89,842 72,518 26,745
Louisiana Fund 233,010 188,768 72,596
Maryland Fund 362,711 309,059 116,248
Missouri Fund 508,048 424,634 163,365
North Carolina Fund 501,620 422,191 161,088
Texas Fund 198,223 193,355 79,386
Virginia Fund 539,321 458,682 174,841
1. For the period from October 1, 1996, through February 28, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is each fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will 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, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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Since most purchases by the funds are principal transactions at net prices,
the funds incurs little or no brokerage costs. Each fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the funds do not buy securities 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 allows 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, also may 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 funds.
During the fiscal years ended February 28, 1999, 1998 and 1997, the funds did
not pay any brokerage commissions.
As of February 28, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code, the funds have
qualified and continue to qualify to pay exempt-interest dividends to you.
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 to you. 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 also will be exempt from that state's personal income taxes. Most
states generally do not grant tax-free treatment to interest on state and
municipal securities of other states.
The funds 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, or on ordinary income derived
from the sale of market discount bonds. Any fund distributions from such
income will be taxable to you as ordinary income, whether you receive them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you
as ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year, 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, a fund may designate and distribute to you, as taxable, tax-exempt
or tax preference income, 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.
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
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. 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, a 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires each fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. Each fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares,
or exchange your fund shares for shares of a different Franklin Templeton
Fund, the IRS will require that you report a gain or loss on your redemption
or exchange. 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 or
short-term, generally depending on how long you hold your shares. 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 fund shares 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 the fund on those shares.
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 If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded 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
consists of interest rather than dividends, no portion of its distributions
generally will 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.
INVESTMENT IN COMPLEX SECURITIES Each fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses. In turn,
these rules may affect the amount, timing or character of the income
distributed to you by a fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Internal
Revenue 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. Persons who are defined in the Internal Revenue 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 fund
shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a series of Franklin Tax-Free Trust, an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Massachusetts business trust in September 1984, and is registered with the
SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
Each fund, except for the Kentucky Fund, currently offers two classes of
shares, Class A and Class C. Before January 1, 1999, Class A shares were
designated Class I and Class C shares were designated Class II. The full
title of each class is:
o Franklin Alabama Tax-Free Income Fund - Class A
o Franklin Alabama Tax-Free Income Fund - Class C
o Franklin Florida Tax-Free Income Fund - Class A
o Franklin Florida Tax-Free Income Fund - Class C
o Franklin Georgia Tax-Free Income Fund - Class A
o Franklin Georgia Tax-Free Income Fund - Class C
o Franklin Louisiana Tax-Free Income Fund - Class A
o Franklin Louisiana Tax-Free Income Fund - Class C
o Franklin Maryland Tax-Free Income Fund - Class A
o Franklin Maryland Tax-Free Income Fund - Class C
o Franklin Missouri Tax-Free Income Fund - Class A
o Franklin Missouri Tax-Free Income Fund - Class C
o Franklin North Carolina Tax-Free Income Fund - Class A
o Franklin North Carolina Tax-Free Income Fund - Class C
o Franklin Texas Tax-Free Income Fund - Class A
o Franklin Texas Tax-Free Income Fund - Class C
o Franklin Virginia Tax-Free Income Fund - Class A
o Franklin Virginia Tax-Free Income Fund - Class C
The Kentucky Fund offers only one share class. Because its sales charge
structure and Rule 12b-1 plan are similar to those of Class A shares, shares
of the Kentucky Fund are considered Class A shares for redemption, exchange
and other purposes.
The funds may offer additional classes of shares in the future.
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of April 12, 1999, the principal shareholders of the funds, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
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TEXAS FUND
Family Ltd. Partnership
Alo Family Limited
4512 Teas St.
Bellaire, TX 77401-4223 Class C 6.15
PaineWebber For the Benefit of
Timothy A. Costello
9501 Bell Mountain Dr.
Austin, TX 78730-2712 Class C 5.98
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 of April 12, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with
a foreign currency exchange factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI.
Your periodic statements will include the reserved shares in the total
shares you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, 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, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards 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 in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the
fund's Class A shares. This waiver category also applies to Class C
shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class
Z shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts
without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Each fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ------------------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 rules of the
National Association of Securities Dealers, Inc.
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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges for establishing or maintaining a
systematic withdrawal plan. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday,
we will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
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. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued. Each fund values
over-the-counter portfolio securities within the range of the most recent
quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, each fund values them
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 NAV 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 NAV.
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, each fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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 Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for
the last three fiscal years ended February 28:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- ---------------------------------------------------------------------------
1999
Alabama Fund 1,184,364 76,087 3,487
Florida Fund 5,317,330 337,465 35,807
Georgia Fund 760,914 42,248 11,492
Kentucky Fund 343,647 22,834 -
Louisiana Fund 716,996 46,235 3,048
Maryland Fund 1,309,307 82,392 10,749
Missouri Fund 1,996,212 120,370 5,859
North Carolina Fund 1,781,352 100,011 14,317
Texas Fund 282,886 17,460 1,125
Virginia Fund 1,754,574 110,385 10,724
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 -
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 95,165 6,473
Texas Fund 310,914 20,220 1,447
Virginia Fund 1,501,600 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 254,844 16,652 16
Virginia Fund 1,202,582 76,437 1,039
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by each fund under the Class A plan may not exceed
0.10% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have
incurred them.
In implementing the Class A plan, the board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
the fund's Class A shares 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
the fund's Class A shares 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 A expense. This means that all Class A 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 A and, as Class A shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class A shares purchased on or after May 1, 1994, increases in relation to
outstanding Class A shares, the expenses attributable to payments under the
plan also will 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 A plan, the plan permits the board to allow the fund to pay a
full 0.10% on all assets at any time. The approval of the board would be
required to change the calculation of the payments to be made under the Class
A plan.
The Class A plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS C PLAN. Under the Class C plans, the fund pays Distributors up to
0.50% per year of the class's average daily net assets, payable quarterly, to
pay Distributors or others for providing distribution and related services
and bearing certain expenses. All distribution expenses over this amount will
be borne by those who have incurred them. The fund also may pay a servicing
fee of up to 0.15% per year of the class's average daily net assets, payable
quarterly. 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 expenses relating to the Class C plan also are used to pay Distributors
for advancing the commission costs to securities dealers with respect to the
initial sale of Class C shares.
THE CLASS A AND C 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
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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. Distributors
or any dealer or other firm also may 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 noninterested board members, 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, 1999, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the funds paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- ------------------------------------------------------------------------------
Alabama Fund - Class A 263,806 208,274
Alabama Fund - Class C 117,792 75,909
Florida Fund - Class A 1,923,363 1,556,429
Florida Fund - Class C 647,063 430,592
Georgia Fund - Class A 246,069 150,648
Georgia Fund - Class C 162,210 82,938
Kentucky Fund 124,230 59,051
Louisiana Fund - Class A 193,708 130,917
Louisiana Fund - Class C 94,882 46,261
Maryland Fund - Class A 314,716 223,888
Maryland Fund - Class C 151,286 88,149
Missouri Fund - Class A 427,164 312,809
Missouri Fund - Class C 175,293 93,317
North Carolina Fund - Class A 388,615 303,507
North Carolina Fund - Class C 332,645 183,005
Texas Fund - Class A 177,070 111,102
Texas Fund - Class C 48,823 21,057
Virginia Fund - Class A 409,989 326,787
Virginia Fund - Class C 180,589 109,653
PERFORMANCE
- ------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
funds are based on the standardized methods of computing performance mandated
by the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
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 initial 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended February 28,
1999, were:
INCEPTION 1 5 10 SINCE
DATE YEAR YEARS YEARS INCEPTION
- -------------------------------------------------------------------------------
CLASS A
Alabama Fund 09/01/87 -1.17% 4.87% 7.00% 7.28%
Florida Fund 09/01/87 1.23% 5.26% 7.32% 7.67%
Georgia Fund 09/01/87 0.73% 4.91% 7.13% 7.37%
Kentucky Fund 10/12/91 1.01% 5.36% - 6.93%
Louisiana Fund 09/01/87 0.71% 4.96% 7.16% 7.35%
Maryland Fund 10/03/88 1.13% 5.28% 7.23% 7.07%
Missouri Fund 09/01/87 0.67% 5.30% 7.43% 7.53%
North Carolina Fund 09/01/87 1.03% 5.05% 7.10% 7.44%
Texas Fund 09/01/87 0.39% 5.18% 7.22% 7.56%
Virginia Fund 09/01/87 0.90% 5.07% 7.26% 7.49%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ------------------------------------------------------------------------------
CLASS C
Alabama Fund 0.64% 6.02%
Florida Fund 3.18% 6.45%
Georgia Fund 2.69% 6.05%
Louisiana Fund 2.55% 6.42%
Maryland Fund 3.06% 6.65%
Missouri Fund 2.58% 6.62%
North Carolina Fund 3.01% 6.45%
Texas Fund 2.38% 6.62%
Virginia Fund 2.75% 6.37%
The following SEC formula was used to calculate these figures:
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 initial 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 returns for the
indicated periods ended February 28, 1999, were:
INCEPTION 1 5 10 SINCE
DATE YEAR YEARS YEARS INCEPTION
- ------------------------------------------------------------------------------
CLASS A
Alabama Fund 09/01/87 -1.17% 26.87% 96.75% 124.27%
Florida Fund 09/01/87 1.23% 29.19% 102.72% 133.89%
Georgia Fund 09/01/87 0.73% 27.08% 99.05% 126.53%
Kentucky Fund 10/12/91 1.01% 29.80% - 64.03%
Louisiana Fund 09/01/87 0.71% 27.41% 99.63% 125.85%
Maryland Fund 10/03/88 1.13% 29.35% 100.93% 103.59%
Missouri Fund 09/01/87 0.67% 29.44% 104.68% 130.29%
North Carolina Fund 09/01/87 1.03% 27.93% 98.56% 128.26%
Texas Fund 09/01/87 0.39% 28.72% 100.73% 131.17%
Virginia Fund 09/01/87 0.90% 28.06% 101.49% 129.29%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ------------------------------------------------------------------------------
CLASS C
Alabama Fund 0.64% 25.09%
Florida Fund 3.18% 27.03%
Georgia Fund 2.69% 25.22%
Louisiana Fund 2.55% 26.92%
Maryland Fund 3.06% 27.95%
Missouri Fund 2.58% 27.84%
North Carolina Fund 3.01% 27.07%
Texas Fund 2.38% 27.83%
Virginia Fund 2.75% 26.66%
CURRENT YIELD Current yield shows the income per share earned by a fund. It
is calculated by dividing the net investment income per share 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 yields for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- ------------------------------------------------------------------------------
Alabama Fund 4.14% 3.72%
Florida Fund 3.78% 3.35%
Georgia Fund 3.85% 3.43%
Kentucky Fund 3.99% -
Louisiana Fund 4.11% 3.69%
Maryland Fund 3.86% 3.45%
Missouri Fund 3.95% 3.53%
North Carolina Fund 3.83% 3.41%
Texas Fund 3.94% 3.52%
Virginia Fund 3.95% 3.53%
The following SEC formula was used to calculate these figures:
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 Each fund also may quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by
dividing the portion of the 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 yield that is not tax-exempt, if any. The
taxable-equivalent yields for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- ------------------------------------------------------------------------------
Alabama Fund 7.22% 6.48%
Florida Fund 6.26% 5.55%
Georgia Fund 6.78% 6.04%
Kentucky Fund 7.03% -
Louisiana Fund 7.24% 6.50%
Maryland Fund 6.93% 6.19%
Missouri Fund 6.96% 6.22%
North Carolina Fund 6.87% 6.12%
Texas Fund 6.52% 5.83%
Virginia Fund 6.94% 6.20%
As of February 28, 1999, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations are based were as follows:
COMBINED RATE
- ------------------------------------------------------------------------------
Alabama Fund 42.6%
Florida Fund 39.6%
Georgia Fund 43.2%
Kentucky Fund 43.2%
Louisiana Fund 43.2%
Maryland Fund 44.3%
Missouri Fund 43.2%
North Carolina Fund 44.3%
Texas Fund 39.6%
Virginia Fund 43.1%
From time to time, as any changes to the rate 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, if any, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended February 28,
1999, were:
CLASS A CLASS C
- ------------------------------------------------------------------------------
Alabama Fund 4.92% 4.47%
Florida Fund 4.82% 4.38%
Georgia Fund 4.71% 4.33%
Kentucky Fund 4.86% -
Louisiana Fund 4.86% 4.41%
Maryland Fund 4.53% 4.08%
Missouri Fund 4.71% 4.29%
North Carolina Fund 4.68% 4.23%
Texas Fund 4.88% 4.39%
Virginia Fund 4.69% 4.27%
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- ------------------------------------------------------------------------------
Alabama Fund 8.57% 7.79%
Florida Fund 7.98% 7.25%
Georgia Fund 8.30% 7.63%
Kentucky Fund 8.56% -
Louisiana Fund 8.56% 7.77%
Maryland Fund 8.13% 7.32%
Missouri Fund 8.30% 7.56%
North Carolina Fund 8.40% 7.59%
Texas Fund 8.08% 7.27%
Virginia Fund 8.24% 7.50%
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 also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and
mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage
and Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o 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.
o Financial publications: The Wall Street Journal, and Business Week,
Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
o 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.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for each fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by each fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, as well as the value
of its shares that are based upon the value of such portfolio investments,
can be expected to decrease. Conversely, when interest rates decrease, the
value of the fund's shares can be expected to increase. CDs are frequently
insured by an agency of the U.S. government. An investment in 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 any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue its 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 the funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 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 $51 billion in municipal security 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
June 30, 1998.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1999, 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 1999). 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 also may 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 municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF RATINGS
- ------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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. These 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 that are speculative to a
high degree. These 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 that
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.
STANDARD & POOR'S CORPORATION (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 these bonds will likely have some quality and
protective characteristics, they 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 INVESTORS SERVICE, INC. (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 that 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 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. Business and financial alternatives can be
identified, however, that 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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, 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 for both short-term debt and commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes
in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect 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
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The following information on the state income tax treatment of dividends from
a 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(3)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(3)d provides similar tax-exempt treatment for interest on exempt
obligations of the U.S. government or its possessions including Puerto Rico,
Guam and
the Virgin Islands. In addition, Regulation Section
810-3-14-.02(4)(b)2 and an administrative ruling of the Alabama Department of
Revenue, dated March 1, 1990, 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 (as well as the instructions to Alabama Form 40) also
indicates that the exemption would apply to Alabama municipal obligations.
Tax-exempt treatment generally is 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
generally will be taxable.
Any distributions of 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 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 exempt 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 previous 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 tax. The remaining net asset value of the fund (and
corresponding value of fund shares) 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 also is exempt from the state's individual income tax.
According to the instructions to Georgia's personal income tax return,
distributions from the Georgia Fund attributable to interest on obligations
of the state of Georgia and its political subdivisions and, apparently, to
interest on obligations of the U.S. government, its territories and
possessions will be excluded from the Georgia individual income tax.
Tax-exempt treatment generally is 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 generally will be taxable.
Any distributions of capital gains earned by the fund are fully included in
each individual shareholder's Georgia taxable income as dividend income and
capital gain, respectively, and are currently taxed at ordinary income tax
rates.
KENTUCKY Pursuant to Kentucky Revised Statute 141.010(10)(a) and (12)(a),
interest earned on exempt obligations of the U.S. government, its agencies
and instrumentalities, or its territories (including Puerto Rico, Guam and
the Virgin Islands) and obligations issued by the Commonwealth of Kentucky or
its political subdivisions will be exempt from Kentucky's personal income
tax. Under Kentucky Income Tax Revenue Policy 42P161 (as revised December 1,
1990), dividends from regulated investment companies, such as the Kentucky
Fund, which are derived from such exempt obligations, also will be exempt
from state income tax. Tax-exempt treatment generally is 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 generally
will be taxable.
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 exempt obligations of the state of Louisiana or its
political subdivisions and interest earned on exempt obligations of the U.S.
government or its agencies and possessions (including Puerto Rico, Guam and
the Virgin Islands) is exempt from individual and corporate income tax. Under
Section 47:293, distributions from a regulated investment company, such as
the Louisiana Fund, also will 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 generally is 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 generally
will be taxable.
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 Distributions from the Maryland Fund attributable to interest on
obligations of the state of Maryland and its political subdivisions are
excluded from Maryland's personal income tax. Under Section 10-207(c) 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) also is 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 generally is 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
generally will be taxable.
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 also may be tax-exempt to the fund's shareholders.
Distributions of capital gains 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 generally is 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 generally will be taxable.
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 exempt obligations of the U.S. government, its
possessions, or its territories (including Puerto Rico, Guam and the Virgin
Islands) and exempt 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 generally is 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 generally will be
taxable.
Distributions of capital gains attributable from the sale of certain North
Carolina obligations issued before 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 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
Section 23 Virginia Administrative Code 10-110-14, distributions from a
regulated investment company, such as the Virginia Fund, also will be exempt
from personal income tax if the fund invests in such exempt obligations.
Tax-exempt treatment generally is 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 generally will be
taxable.
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 CLASS
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, 1999
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated July 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
funds. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended February 28, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or
call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ................................. 2
Risks ................................................ 7
Officers and Trustees ................................ 10
Management and Other Services ........................ 13
Portfolio Transactions ............................... 14
Distributions and Taxes .............................. 15
Organization, Voting Rights
and Principal Holders ............................... 16
Buying and Selling Shares ............................ 17
Pricing Shares ....................................... 22
The Underwriter ...................................... 23
Performance .......................................... 25
Miscellaneous Information ............................ 29
Description of Ratings ............................... 30
State Tax Treatment .................................. 32
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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TF3 SAI 07/99
GOALS AND STRATEGIES
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The Federal Intermediate Fund's investment goal 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 High Yield Fund's principal investment goal is to provide investors with
a high current yield exempt from federal income taxes. Its secondary goal is
capital appreciation to the extent possible and consistent with the fund's
principal investment goal.
The Puerto Rico Fund's investment goal 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 and may be changed without
shareholder approval.
Each state fund's investment goal is to provide investors with as high a
level of income exempt from federal income taxes and from personal income
taxes 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 they may not be changed without
shareholder approval. Of course, there is no assurance that any fund will
meet its goal.
As a fundamental policy, each fund normally invests at least 80% of its
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax. Each fund applies this test to
its net assets, except for the Federal Intermediate Fund, which applies this
test to its total assets. Each state fund, as a fundamental policy, also
normally invests at least 80% of its net assets in securities that pay
interest free from the personal income taxes, if any, of its state. As a
nonfundamental policy, each state fund and the Puerto Rico Fund also normally
invest at least 65% of their total assets in municipal securities of their
state or territory. Unlike the state and Puerto Rico Funds, the Federal
Intermediate and High Yield Funds are diversified nationally. The High Yield
Fund will not invest more than 25% of its total assets in the municipal
securities of any one state or territory.
Municipal securities issued by a fund's state or that state's counties,
municipalities, authorities, agencies, or other subdivisions, generally pay
interest free from federal income tax and 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 tries 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
also may 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.
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. While this feature helps protect against a decline in the security's
market price when interest rates go up, it lowers the fund's income when
interest rates fall. 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 one to 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. Each fund generally uses variable or floating rate securities as
short-term investments while waiting for long-term investment opportunities.
MUNICIPAL LEASE OBLIGATIONS Each fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally 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
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, 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.
The board of trustees reviews each fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board. These factors may 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.
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 may receive
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. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
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. A call of some or all of these securities may lower a fund's income
and its distributions to shareholders. 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 the 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.
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.
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. Each fund may invest in taxable commercial paper
only for temporary defensive purposes.
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 the 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 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.
Generally, to meet federal tax requirements at the close of each quarter, a
fund may not invest more than 25% of its total assets in any one issuer and,
with respect to 50% of total assets, may not invest more than 5% of its total
assets in any one issuer. These limitations do not apply to U.S. government
securities and may be revised if applicable federal income tax requirements
are revised.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, including the
unavailability of securities that meet a fund's investment criteria, it may
invest each 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 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. Each fund also may invest all of its assets in
municipal securities issued by a U.S. territory such as Guam, Puerto Rico or
the Mariana Islands.
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.
CREDIT 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 Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (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.
These ratings are described at the end of this SAI under "Description of
Ratings."
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 guarantees 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.
As discussed in the prospectus, each fund has limitations on the credit
quality of the securities it may buy. These limitations are generally applied
when a fund makes an investment so that a fund is not required to sell a
security because of a later change in circumstances.
The High Yield Fund invests at least 65% of its assets in high yield
securities. The High Yield Fund may invest in securities rated in any rating
category, including defaulted securities if the manager believes the issuer
may resume making interest payments or other favorable developments seem
likely in the near future. The High Yield Fund, however, currently does not
intend to invest more than 10% of its assets in defaulted securities. 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 High Yield Fund's portfolio.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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 manager own beneficially more
than one-half 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 each 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) 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 investment 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 Investment Company Act
of 1940, 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 Franklin Advisers, Inc. 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the 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.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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STATE 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 and
is subject to change. The information below is based on data available to the
funds from 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. Strong overall employment growth, affordable housing, and an
attractive climate have helped Arizona's population grow at a rate four times
faster than the national rate during the 1990s. Although population growth is
expected to remain strong in the near term, the rate of growth has slowed
since 1996 as a result of California's economic recovery and thus less
migration from that state. Competitive wage rates, low energy costs,
corporate tax reductions and an abundance of land also have helped to attract
businesses to the state. As a result, Arizona's unemployment in 1998 was at
its lowest level since the early 1970s.
Arizona's economy has continued to diversify, especially in the manufacturing
and services areas. As of August 1998, manufacturing accounted for
approximately 10.5% of the state's total employment, trade 24.3%, services
30.4%, government 16.1%, and construction 6.6%. Farming and mining accounted
for less than 2% of the total workforce. Improved diversification may help
reduce the state's economic vulnerability that in the past resulted from
Arizona's historical dependence on its farming, mining and real estate
industries. Arizona may be vulnerable, however, to events affecting
high-technology products and to recent and future economic problems in Asia.
Approximately 80% of the state's exports have been in the area of
high-technology products and Asian exports have supported at least 100,000
jobs in the state.
Under its constitution, Arizona cannot issue general obligation debt. Thus,
gross state debt levels have remained moderate. The state historically has
relied on lease obligations, revenue bonds, and pay-as-you-go financing for
its capital needs.
Arizona's strong economic growth and higher-than-anticipated tax revenues
have allowed the state to post four consecutive operating surpluses and
general fund balance increases. Preliminary 1998 results show another
operating surplus. During fiscal 1999, however, a reduction in the general
fund balance is expected with the implementation of new school capital
funding legislation.
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, also has 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.
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.
CONNECTICUT. Connecticut's recovery from the recession of the early 1990s has
been slower than the rest of the nation. Over the past two years, however,
the state's economic recovery has shown signs of improved strength. Gains in
tourism and business services have led to greater economic diversification as
the economy has continued to move from manufacturing and defense related
industries towards services. Although manufacturing still represented over
16% of the state's employment base in 1998, the services sector accounted for
more than 31% of employment.
Connecticut has sought to further its economic growth with various business
and tax incentives such as corporate and sales tax rate cuts, corporate tax
credits for research and development and various other business tax credits.
Nonetheless, the state's tight labor market, slow population growth and high
wages may limit future growth.
The state's financial results have been positive in recent years, with budget
surpluses for the past seven years. Connecticut's improved financial
performance has resulted in part from various fiscal reforms including a
constitutional amendment requiring balanced budgets, expenditure caps and the
implementation of a personal income tax. These improvements have allowed the
state to fully fund its rainy day reserve. Potential areas of financial
stress may include increased spending for education, an unfunded pension
liability, and a relatively high debt burden.
INDIANA. Despite some diversification, Indiana's economy has remained
dependent on its durable goods manufacturing sector. As of February 1999,
manufacturing accounted for 24% of all jobs in the state, the highest
percentage in the U.S. The state's reliance on manufacturing makes it more
vulnerable to domestic and international business cycles than more diverse
states. The state's employment growth has been slow in recent years and its
already tight labor market could further constrain future growth.
Financially, the state's performance has been positive. The state ended
fiscal 1998 with a surplus and was able to further increase its reserves. At
the end of fiscal 1998, Indiana's reserve levels were among the strongest in
the nation. The state, however, has a significant unfunded pension liability
that totaled $7.2 billion as of January 1999. To address this problem, the
state has created a pension stabilization fund. The state hopes that
appropriations to the stabilization fund will help limit the effect of the
liability on the state's general fund.
MICHIGAN. While Michigan's economy has diversified to some degree, it has
remained dependent on its durable goods manufacturing sector, especially on
its cyclical auto industry. In recent years, manufacturing has accounted for
22% of the state's employment and 33% of personal income. While this sector
has been strong since the end of the national recession in the early 1990s
and has made improvements that could potentially lessen its historical
volatility, the state's reliance on manufacturing has made its economy
potentially more volatile than the economies of more diverse states and more
susceptible to the adverse effects of another recession.
Since 1992, Michigan's economy has grown at a healthy pace. Unemployment
levels have been below national levels since 1994 and, through September
1998, employment levels were at an all-time high. With the help of its strong
economy, Michigan's finances also have improved. 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 at more
than $1 billion at September 30, 1998. Michigan may need the increased
stability these reserve levels provide to offset higher school funding
requirements. The state also has been able to maintain its traditionally low
debt levels, although contingent debt levels issued through school programs
and based on the state's credit have grown rapidly, approaching levels almost
double the state's outstanding direct debt. The state's contingent debt
exposure will need to be carefully managed in the coming years to help
maintain the state's financial stability.
NEW JERSEY. Historically, New Jersey's economy has been one of the most
diverse in the nation. Like many other states in the northeast region, New
Jersey was hit especially hard by the recession in the early 1990s and has
been slower to recover than many other states. Over the past two years,
however, the state's performance has improved. Jobs grew at a rate of 2.3% in
1997 and 2% in 1998. While these rates were below the national rates of 2.5%
in 1997 and 2.6% in 1998, they led the region. Unemployment levels also have
decreased to 4.8% in 1998, slightly above the national rate of 4.5%.
The state ended fiscal 1998 with a surplus and increased its fund balances to
$1.25 billion. The state's positive financial performance was aided by strong
growth in personal income tax receipts. Much of this growth was from the
high-income taxpayer base, which grew due in part to the recent success of
the financial services sector. The state's increased reliance on high-income
taxpayers and the success of the financial markets may make it more
vulnerable to an economic downturn.
The state's outstanding debt has grown significantly in recent years. As of
January 1999, the state ranked near the top in net tax-supported debt, ratio
of debt to personal income and debt per capita. Nonetheless, debt service has
remained manageable in light of the state's resources.
OREGON. Oregon's economy has experienced strong growth, primarily in its
hi-tech manufacturing and housing construction sectors. Growth has slowed
recently, however, due to economic troubles in Asia. 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, and the performance of
Pacific Rim economies. Economic growth may be hampered, however, by the
state's rising labor and housing costs, which have lessened Oregon's
competitive position in attracting new businesses.
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. As of March 1999, the state has been
successful in meeting the requirements of Measure 5, which has increased
state spending for schools from 33% of the general fund budget to more than
40%. On May 20, 1997, voters passed Measure 50, which has placed some
pressure on the state's budget. This measure could negatively impact the
revenue-raising flexibility of the state and make it more vulnerable to an
economic downturn.
PENNSYLVANIA. Although improving, the performance of Pennsylvania's economy
has continued to lag the national average. The largest growth areas have been
business, health care, and consumer services, which have helped to offset
declines in the manufacturing, mining and machinery sectors. Overall, job
growth was 0.9% from April 1998 to April 1999, compared to a national rate of
2.5%. Population and personal income growth also have remained below national
levels.
To try to improve its economic performance, Pennsylvania recently made
economic development a priority. To attract new business, the commonwealth
has implemented various business tax cuts and has attempted to ease its
regulatory environment. These steps, together with the commonwealth's strong
education, health care and transportation systems, could help to provide a
positive environment for attracting businesses.
Historically, Pennsylvania's financial performance has been tied to
fluctuations in both national and regional economic trends. In recent years,
improvements in the commonwealth's economy and higher-than-expected tax
revenues have helped strengthen the commonwealth's financial position. The
commonwealth ended fiscal 1998 with an operating surplus and increased its
reserve levels. Due to the cyclical nature of its economy and financial
performance, the commonwealth has been committed to using surpluses to build
reserves, rather than to increase spending, in the hope of providing some
security against future economic downturns or other uncertainties that could
affect the state.
U.S. TERRITORIES 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 municipal
issuers in U.S. territories to continue to make principal and interest
payments also may 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 funds 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 and is subject
to change. It is based on data available to the funds from historically
reliable sources, but it has not been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on tourism. 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. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.8% in gross island product between
1997 and 1998.
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. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
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 also may 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 May 20, 1999, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and inability to meet 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.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico also will need to address its large
unfunded pension liability of more than $6 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
Internal Revenue Code. This 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. Outstanding issues relating to the potential for a transition to
statehood also may have broad implications for Puerto Rico and its financial
and credit position.
CREDIT (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 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 and affect its performance.
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
also may 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 also may 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 also may make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the fund's
portfolio.
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, 1999.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
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AAA 24.0 1
AA 2.2
A 8.5 2
BBB 20.6 3
BB 27.3 4
B 8.7 5
CCC 1.2
Not Rated 7.5 6
1. 9.2% are unrated and have been included in the AAA rating category.
2. 0.4% are unrated and have been included in the A rating category.
3. 7.1% are unrated and have been included in the BBB rating category.
4. 15.8% are unrated and have been included in the BB rating category.
5. 1.1% are unrated and have been included in the B rating category.
6. This figure includes securities that have not been rated by S&P but that
have been rated by another rating agency.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
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 27 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 (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 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 (66)
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 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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 (66)
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
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 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (36)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $1,450 per month plus $1,300 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME TRUST 1 OF FUNDS 2 EACH SERVES 3
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Frank H. Abbott, III $25,675 $159,051 27
Harris J. Ashton 26,390 361,157 48
S. Joseph Fortunato 25,097 367,835 50
Edith E. Holiday 28,650 211,400 24
Frank W.T. LaHaye 26,975 163,753 27
Gordon S. Macklin 26,390 361,157 48
1. For the fiscal year ended February 28, 1999. During the period from March
1, 1998, through May 31, 1998, fees at the rate of $1,300 per month plus
$1,300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the funds' portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the funds, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage 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 applicable federal securities laws, 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 fund or other funds 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.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of its net assets up to and including $100 million;
and
o 1/24 of 1% of the value of its net assets over $100 million up to and
including $250 million; and
o 9/240 of 1% of the value of its net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a funds'
shares pays its proportionate share of the fee.
For the last three fiscal years ended February 28, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Arizona Fund 4,124,084 3,799,811 3,627,685
Colorado Fund 1,615,981 1,432,605 1,259,548
Connecticut Fund 1,313,337 1,126,660 1,012,114
Federal Intermediate Fund 1 901,601 628,115 438,843
High Yield Fund 29,382,074 24,164,691 19,114,157
Indiana Fund 357,518 330,541 311,799
Michigan Fund 2 0 0 0
MANAGEMENT FEES PAID ($)
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
New Jersey Fund 3,411,855 3,074,915 2,827,318
Oregon Fund 2,429,095 2,119,137 1,964,313
Pennsylvania Fund 3,734,742 3,414,301 3,181,417
Puerto Rico Fund 1,223,542 1,137,320 1,083,818
1. For the fiscal years ended February 28, 1999, 1998 and 1997, management
fees before any advance waiver, totaled $959,067, $718,091, and $586,462,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
2. For the fiscal years ended February 28, 1999, and 1998, and for the period
from July 1, 1996, through February 28, 1997, management fees before any
advance waiver, totaled $82,747, $44,302, and $12,802, respectively. Under
agreements by the manager to limit its fees, the fund paid the management
fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended February 28, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
------------------------------------
1999 1998 1997 1
- -------------------------------------------------------------------------------
Arizona Fund 1,132,869 1,060,456 430,330
Colorado Fund 436,830 383,050 144,807
Connecticut Fund 347,940 298,352 114,062
Federal Intermediate Fund 246,943 176,069 62,460
High Yield Fund 5,411,515 4,519,848 1,626,344
Indiana Fund 85,406 79,053 31,765
Michigan Fund 19,373 10,238 2,069
New Jersey Fund 970,458 872,308 339,343
Oregon Fund 679,370 587,736 229,705
Pennsylvania Fund 1,046,296 971,653 384,008
Puerto Rico Fund 325,819 301,686 120,593
1. For the period from October 1, 1996, through February 28, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/
Templeton Investor Services, Inc. (Investor Services) is each fund's
shareholder servicing agent and acts as the funds' transfer agent and
dividend-paying agent. Investor Services is located at 777 Mariners Island
Blvd., San Mateo, CA 94404. Please send all correspondence to Investor
Services to P.O. Box 997151, Sacramento, CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will 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, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
Since most purchases by the funds are principal transactions at net prices,
the funds incur little or no brokerage costs. Each fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the funds do not buy securities 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 allows 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, also may 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 funds.
During the fiscal years ended February 28, 1999, 1998 and 1997, the funds did
not pay any brokerage commissions.
As of February 28, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code, the funds have
qualified and continue to qualify to pay exempt-interest dividends to you.
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 to you. 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 also will be exempt from that state's personal income taxes. Most
states generally do not grant tax-free treatment to interest on state and
municipal securities of other states.
The funds 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, or on ordinary income derived
from the sale of market discount bonds. Any fund distributions from such
income will be taxable to you as ordinary income, whether you receive them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year, 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, a fund may designate and distribute to you, as taxable, tax-exempt
or tax preference income, 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.
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
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. 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, a 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires each fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. Each fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. 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 or short-term, generally depending on how long you hold your
shares. 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 fund shares 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 the fund on those shares.
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 If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded 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
consists of interest rather than dividends, no portion of its distributions
generally will 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.
INVESTMENT IN COMPLEX SECURITIES Each fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses. In turn,
these rules may affect the amount, timing or character of the income
distributed to you by a fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while still exempt from regular federal income tax, is a
preference item for taxpayers when determining their alternative minimum tax
under the Internal Revenue 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. Persons who are
defined in the Internal Revenue 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 fund shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a series of Franklin Tax-Free Trust, an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Massachusetts business trust in September 1984, and is registered with the
SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The High Yield Fund currently offers three classes of shares, Class A, Class
B and Class C. The Arizona, Colorado, Connecticut, New Jersey, Oregon,
Pennsylvania, and Puerto Rico Funds currently offer two classes of shares,
Class A and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The High Yield Fund
began offering Class B shares on January 1, 1999. The full title of each
class is:
o Franklin Arizona Tax-Free Income Fund - Class A
o Franklin Arizona Tax-Free Income Fund - Class C
o Franklin Colorado Tax-Free Income Fund - Class A
o Franklin Colorado Tax-Free Income Fund - Class C
o Franklin Connecticut Tax-Free Income Fund - Class A
o Franklin Connecticut Tax-Free Income Fund - Class C
o Franklin High Yield Tax-Free Income Fund - Class A
o Franklin High Yield Tax-Free Income Fund - Class B
o Franklin High Yield Tax-Free Income Fund - Class C
o Franklin New Jersey Tax-Free Income Fund - Class A
o Franklin New Jersey Tax-Free Income Fund - Class C
o Franklin Oregon Tax-Free Income Fund - Class A
o Franklin Oregon Tax-Free Income Fund - Class C
o Franklin Pennsylvania Tax-Free Income Fund - Class A
o Franklin Pennsylvania Tax-Free Income Fund - Class C
o Franklin Puerto Rico Tax-Free Income Fund - Class A
o Franklin Puerto Rico Tax-Free Income Fund - Class C
The Federal Intermediate, Indiana and Michigan Funds each offer only one
share class. Because their sales charge structures and Rule 12b-1 plans are
similar to those of Class A shares, shares of these funds are considered
Class A shares for redemption, exchange and other purposes.
The funds may offer additional classes of shares in
the future.
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of April 12, 1999, the principal shareholders of the funds, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
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MICHIGAN FUND
Franklin Resources Inc. Class A 16.02
Corporate Accounting
555 Airport Boulevard 4th Fl
Burlingame, CA 94010
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 of April 12, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
INITIAL SALES CHARGES The maximum initial sales charge is 2.25% for the
Federal Intermediate Fund. For each of the other funds, the maximum initial
sales charge is 4.25% for Class A and 1% for Class C. There is no initial
sales charge for Class B shares of the High Yield Fund.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, 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, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards 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 in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in a fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- -------------------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 rules of the National Association of Securities Dealers,
Inc.
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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less. A CDSC will not
apply to Class A purchases over $250 million in the High Yield Fund.
For Class B shares of the High Yield Fund, there is a CDSC if you sell your
shares within six years, as described in the table below. The charge is based on
the value of the shares sold or the net asset value at the time of purchase,
whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- -------------------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
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, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges for establishing or maintaining a
systematic withdrawal plan. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
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. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued. Each fund values
over-the-counter portfolio securities within the range of the most recent quoted
bid and ask prices. If portfolio securities trade both in the over-the-counter
market and on a stock exchange, each fund values them 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 NAV 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 NAV. 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, each
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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 Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
February 28:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -------------------------------------------------------------------------------
1999
Arizona Fund 3,109,731 204,136 12,269
Colorado Fund 1,230,170 75,655 8,464
Connecticut Fund 1,280,521 72,556 7,518
Federal Intermediate Fund 408,916 55,742 4,464
High Yield Fund 24,360,736 1,514,537 283,409
Indiana Fund 206,649 14,009 -
Michigan Fund 208,099 13,810 -
New Jersey Fund 2,838,883 169,312 23,450
Oregon Fund 2,294,919 142,478 13,763
Pennsylvania Fund 2,942,369 186,194 16,329
Puerto Rico Fund 703,085 44,229 5,057
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 -
High Yield Fund 27,355,789 1,661,281 114,622
Indiana Fund 188,219 12,470 -
Michigan Fund 112,690 7,243 -
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 -
High Yield Fund 26,688,526 1,654,304 52,856
Indiana Fund 200,618 13,121 -
Michigan Fund 43,942 2,585 -
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
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.15 per year for the Michigan Fund (although it is currently only
reimbursing up to 0.10%), and 0.10% per year for the remaining funds, of
Class A's average daily net assets, payable quarterly. All distribution
expenses over this amount will be borne by those who have incurred them.
In implementing the Class A plan, the board has determined that the annual
fees payable under the plan for each fund, except the Federal Intermediate
and Michigan Funds, will be equal to the sum of: (i) the amount obtained by
multiplying 0.10% by the average daily net assets represented by the fund's
Class A shares 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 the fund's
Class A shares 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 A expense. This means that all Class A 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 A and, as Class A shares are sold on or
after May 1, 1994, will increase over time. Thus, as the proportion of Class
A shares purchased on or after May 1, 1994, increases in relation to
outstanding Class A shares, the expenses attributable to payments under the
plan also will 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 A plan for each fund, except the Federal Intermediate and
Michigan Funds, the plan permits the board to allow such funds 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 A plan.
The Class A plan for each fund, except the Michigan Fund, does not permit
unreimbursed expenses incurred in a particular year to be carried over to or
reimbursed in later years.
THE CLASS B (HIGH YIELD FUND ONLY) AND C PLANS. Under the Class B and C
plans, the fund pays Distributors up to 0.50% per year of the class's average
daily net assets, payable monthly for Class B and quarterly for Class C, to
pay Distributors or others for providing distribution and related services
and bearing certain expenses. All distribution expenses over this amount will
be borne by those who have incurred them. The fund also may pay a servicing
fee of up to 0.15% per year of the class's average daily net assets, payable
monthly for Class B and quarterly for Class C. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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 a
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 Fund's plan also may be terminated by any act that constitutes
an assignment of the underwriting agreement with Distributors. Distributors
or any dealer or other firm also may 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 noninterested board members, 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, 1999, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the funds paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT PAID
ELIGIBLE BY THE
EXPENSES ($) FUND ($)
- --------------------------------------------------------------------------------
Arizona Fund - Class A 905,874 756,099
Arizona Fund - Class C 228,434 118,919
Colorado Fund - Class A 273,334 206,877
Colorado Fund - Class C 201,435 88,879
Connecticut Fund - Class A 401,801 266,061
Connecticut Fund - Class C 189,417 99,834
Federal Intermediate Fund 302,601 160,061
High Yield Fund - Class A 8,022,234 5,149,820
High Yield Fund - Class B1 167,011 1,654
High Yield Fund - Class C 5,282,583 3,431,976
Indiana Fund - Class A 105,872 50,981
Michigan Fund - Class A 44,118 12,261
New Jersey Fund - Class A 740,497 603,991
New Jersey Fund - Class C 409,626 237,210
Oregon Fund - Class A 589,949 412,566
Oregon Fund - Class C 301,399 154,878
Pennsylvania Fund - Class A 812,111 673,325
Pennsylvania Fund - Class C 345,946 208,598
Puerto Rico Fund - Class A 236,743 192,324
Puerto Rico Fund - Class C 65,212 33,042
1. For the period from January 1, 1999, through February 28, 1999.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. Performance figures reflect Rule 12b-1 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.
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 initial 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 initial sales charge currently in effect.
When considering the average annual total return quotations you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended February 28,
1999, were:
INCEPTION 1 5 10 SINCE
DATE YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
CLASS A
Arizona Fund 9/01/87 0.68% 4.99% 7.10% 7.25%
Colorado Fund 9/01/87 0.75% 5.18% 7.34% 7.55%
Connecticut Fund 10/03/88 1.12% 4.95% 6.74% 6.70%
Federal Intermediate
Fund 9/21/92 2.80% 5.56% - 6.54%
High Yield Fund 3/18/86 -0.23% 6.12% 7.85% 8.06%
Indiana Fund 9/01/87 0.74% 4.95% 7.35% 7.58%
Michigan Fund 7/01/96 1.63% - - 7.25%
New Jersey Fund 5/12/88 1.13% 4.99% 7.12% 7.44%
Oregon Fund 9/01/87 0.62% 4.86% 6.86% 6.93%
Pennsylvania Fund 12/01/86 0.63% 5.24% 7.27% 6.77%
Puerto Rico Fund 4/03/85 1.16% 5.20% 7.12% 7.53%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------
CLASS C
Arizona Fund 2.47% 6.17%
Colorado Fund 2.62% 6.62%
Connecticut Fund 3.02% 6.40%
High Yield Fund 1.67% 7.39%
New Jersey Fund 3.06% 6.39%
Oregon Fund 2.55% 6.18%
Pennsylvania Fund 2.44% 6.39%
Puerto Rico Fund 3.04% 6.44%
The following SEC formula was used to calculate these figures:
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 initial 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 returns for the indicated periods
ended February 28, 1999, were:
INCEPTION 1 5 10 SINCE
DATE YEAR YEARS YEARS INCEPTION
- --------------------------------------------------------------------------------
CLASS A
Arizona Fund 9/01/87 0.68% 27.54% 98.62% 123.48%
Colorado Fund 9/01/87 0.75% 28.75% 103.11% 130.95%
Connecticut Fund 10/03/88 1.12% 26.89% 92.06% 96.28%
Federal Intermediate
Fund 9/21/92 2.80% 31.04% - 50.36%
High Yield Fund 3/18/86 -0.23% 34.59% 112.92% 172.76%
Indiana Fund 9/01/87 0.74% 27.30% 103.21% 131.60%
Michigan Fund 7/01/96 1.63% - - 20.50%
New Jersey Fund 5/12/88 1.13% 27.58% 98.96% 117.04%
Oregon Fund 9/01/87 0.62% 26.76% 94.17% 116.08%
Pennsylvania Fund 12/01/86 0.63% 29.08% 101.80% 26.78%
Puerto Rico Fund 4/03/85 1.16% 28.87% 99.02% 174.61%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------
CLASS C
Arizona Fund 2.47% 25.79%
Colorado Fund 2.62% 27.85%
Connecticut Fund 3.02% 26.82%
High Yield Fund 1.67% 31.40%
New Jersey Fund 3.06% 26.77%
Oregon Fund 2.55% 25.84%
Pennsylvania Fund 2.44% 26.78%
Puerto Rico Fund 3.04% 27.02%
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share 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 yields for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- --------------------------------------------------------------------------------
Arizona Fund 3.87% 3.45%
Colorado Fund 3.95% 3.53%
Connecticut Fund 3.81% 3.38%
Federal Intermediate Fund 3.80% -
High Yield Fund 4.71% 4.32%
Indiana Fund 3.89% -
Michigan Fund 4.55% -
New Jersey Fund 3.83% 3.40%
Oregon Fund 3.86% 3.44%
Pennsylvania Fund 4.03% 3.61%
Puerto Rico Fund 3.80% 3.37%
The following SEC formula was used to calculate these figures:
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 Each fund also may quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by dividing
the portion of the 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 yield that is not tax-exempt, if any. The taxable-equivalent
yields for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- ----------------------------------------------------------------------------
Arizona Fund 6.75% 6.01%
Colorado Fund 6.88% 6.15%
Connecticut Fund 6.61% 5.86%
Federal Intermediate Fund 6.29% -
High Yield Fund 7.80% 7.15%
Indiana Fund 6.74% -
Michigan Fund 7.88% -
New Jersey Fund 6.77% 6.01%
Oregon Fund 7.02% 6.26%
Pennsylvania Fund 6.86% 6.15%
Puerto Rico Fund 6.29% 5.58%
As of February 28, 1999, the federal or combined federal and state income tax
rates upon which the taxable-equivalent yield quotations were based were as
follows:
COMBINED RATE
- -------------------------------------------------------------------
Arizona Fund 42.6%
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%
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, if
any, and is calculated over a different period of time. The current distribution
rates for the 30-day period ended February 28, 1999, were:
CLASS A CLASS C
- ----------------------------------------------------------------------
Arizona Fund 4.80% 4.23%
Colorado Fund 4.72% 4.30%
Connecticut Fund 4.74% 4.33%
Federal Intermediate Fund 4.31% -
High Yield Fund 5.40% 4.92%
Indiana Fund 4.87% -
Michigan Fund 4.56% -
New Jersey Fund 4.80% 4.38%
Oregon Fund 4.71% 4.27%
Pennsylvania Fund 4.80% 4.37%
Puerto Rico Fund 4.59% 4.18%
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day
period ended February 28, 1999, were:
CLASS A CLASS C
- ----------------------------------------------------------------------
Arizona Fund 8.37% 7.72%
Colorado Fund 8.23% 7.49%
Connecticut Fund 8.22% 7.51%
Federal Intermediate Fund 7.14% -
High Yield Fund 8.94% 8.15%
Indiana Fund 8.43% -
Michigan Fund 7.90% -
New Jersey Fund 8.49% 7.75%
Oregon Fund 8.57% 7.77%
Pennsylvania Fund 8.18% 7.44%
Puerto Rico Fund 7.60% 6.92%
VOLATILITY Occasionally statistics may be used to show the 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 also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o 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.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o 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.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for each fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or sales material issued by each fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, as well as the value
of its shares that are based upon the value of such portfolio investments,
can be expected to decrease. Conversely, when interest rates decrease, the
value of the fund's shares can be expected to increase. CDs are frequently
insured by an agency of the U.S. government. An investment in 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 any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue its 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 the funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 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 $51 billion in municipal security 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
June 30, 1998.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1999, 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 1999). 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 also may 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 municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
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MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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. These 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 that are speculative to a
high degree. These 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 that
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.
STANDARD & POOR'S CORPORATION (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 these bonds will likely have some quality and
protective characteristics, they 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 INVESTORS SERVICE, INC. (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 that 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 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. Business and financial alternatives can be
identified, however, that 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 short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, 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 for both short-term debt and commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect 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
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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) and 43-1121(3) 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.
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, also will 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.
Any distributions of capital gains earned by the fund are included in each
shareholder's Colorado taxable income as dividend income and 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 exempt 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 exempt federal obligations. Corporate shareholders
generally are subject to Connecticut corporation income taxes on
distributions from the fund.
Sections 12-701(a)(20) and 12-718 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 distribution of capital gains earned by the fund that are attributable to
Connecticut obligations are exempt from Connecticut's individual income tax.
All other distributions of capital gains earned by the fund are included in
each shareholder's Connecticut taxable income as dividend income and capital
gain, respectively, and are taxed at ordinary income 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 generally are 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 also is 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
also may 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.
Any distributions of net short-term and net long-term capital gains earned by
the fund generally will 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.
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). 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.
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 Sections 316.683 and 316-680 of the Oregon Revised Statutes and Oregon
Administrative Rule Section 150-316.680-(B) provide that "state
exempt-interest dividends" that are paid by a regulated investment company,
such as the Oregon Fund, and designated by it as such in a written notice
mailed to its shareholders not later than 60 days after the close of its
taxable year will be excluded from the shareholders' income for purposes of
Oregon's personal income tax. "State exempt-interest dividends" include
distributions of interest attributable both to obligations of the state of
Oregon and its political subdivisions and to 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. Corporate
shareholders generally are subject to the Oregon corporation excise and
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.
Any distributions of capital gain earned by the fund are included in each
shareholder's Oregon taxable income as dividend income and capital gain,
respectively, and are taxed at ordinary income tax rates. However, a
shareholder may defer gain on the sale or other disposition of a capital
asset by reinvesting in a qualified investment fund within six months.
PENNSYLVANIA Sections 301 and 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 exempt obligations of the U.S. or its territories (including
Puerto Rico, Guam and the Virgin Islands). Sections 301 and 303 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, generally are 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.
Distributions paid by the fund also are 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 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 exempt
obligations described above 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 generally are exempt from U.S. federal and
state personal income taxation in all states that impose an income tax,
pursuant to section 103 of the Internal Revenue 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, generally will
be exempt from Puerto Rico taxation pursuant to a ruling received by the fund
dated May 24, 1996.
