As filed with the Securities and Exchange Commission on June 28, 2000
File Nos.
02-94222
811-4149
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 29 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30 (X)
FRANKLIN TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650)312-2000
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
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, 2000
[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
18 Management
20 Distributions and Taxes
22 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
30 Choosing a Share Class
34 Buying Shares
37 Investor Services
40 Selling Shares
42 Account Policies
45 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
GOAL 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
investment management and the 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 that Fund's state.
MAIN INVESTMENT STRATEGIES Under normal market conditions, each Fund invests
predominately in insured municipal securities whose interest is free from
federal income taxes, including the federal alternative minimum tax. In
addition, each state Fund invests predominately in insured municipal
securities that pay interest free from the personal income taxes, if any, of
that 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, including
interest that may be subject to the federal alternative minimum tax.
[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. Municipal securities pay a fixed, floating or variable rate of
interest, and require that the amount borrowed (the "principal") be repaid at
maturity.
[End callout]
Each Fund invests at least 65% of its total assets, and normally more than
that percentage, in insured municipal 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. There are currently 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.
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 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) municipal
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.
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 When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100%
of the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these
types of securities or hold cash when securities meeting the Fund's
investment criteria are unavailable or to maintain liquidity. In these
circumstances, a Fund may be unable to achieve its investment goal.
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 An issuer of municipal securities may 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.
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. 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. A Fund
might also be adversely impacted by the inability of an insurer to meet its
insurance obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
a Fund's distributions, its yield, and the value of your investment in that
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 rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL A municipal security may be prepaid (called) before maturity.
Securities are more likely to be called when interest rates are falling,
because the issuer can issue new securities with lower interest payments. If
a security is called, a 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. A call of some or all
of these securities may lower that 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 rise.
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 involves 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 predominately 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 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.
More detailed information about the Funds, their policies and risks and about
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 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% -5.33%
94 95 96 97 98 99
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, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (4/30/93)
-------------------------------------------------------------------
Arizona Fund 2 -9.34% 5.83% 4.21%
Lehman Brothers Municipal Bond -2.06% 6.91% 5.40%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 4.50% for Class A.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's 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% -4.59%
94 95 96 97 98 99
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, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (4/30/93)
-------------------------------------------------------------------
Florida Fund 2 -8.65% 6.04% 3.89%
Lehman Brothers Municipal Bond -2.06% 6.91% 5.40%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 3.63% for Class A.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's 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]
6.57% 11.35% 9.38% 11.83% -3.59% 13.60% 4.18% 8.11% 6.04% -3.40%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.63%
WORST
QUARTER:
Q1 '94
-4.22%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------
Insured Fund - Class A 2 -7.53% 4.65% 5.80%
Lehman Brothers Municipal Bond -2.06% 6.91% 6.89%
Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
-------------------------------------------------------------------
Insured Fund - Class C 2 -5.75% 3.98%
Lehman Brothers Municipal Bond -2.06% 5.84%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 3.11% 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 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]
5.10% 11.46% 8.98% 11.79% -3.63% 14.06% 8.53% 4.21% 5.39% -3.72%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Massachusetts Fund - Class A 2 -7.81% 4.62% 5.60%
Lehman Brothers Municipal Bond -2.06% 6.91% 6.89%
Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------
Massachusetts Fund - Class C 2 -6.11% 3.85%
Lehman Brothers Municipal Bond -2.06% 5.84%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 3.46% 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 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]
6.10% 10.96% 9.45% 12.09% -3.93% 13.83% 8.87% 3.58% 6.47% -2.27%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
5.70%
WORST
QUARTER:
Q1 '97
-4.60%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Michigan Fund - Class A 2 -6.46% 5.05% 5.90%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------
Michigan Fund - Class C 2 -4.75% 4.37%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 2.61% 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 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]
5.82% 10.86% 8.62% 10.98% -3.55% 13.31% 3.49% 7.69% 5.68% -3.74%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------
Minnesota Fund - Class A 2 -7.82% 4.22% 5.31%
Lehman Brothers Municipal Bond -2.06% 6.91% 6.89%
Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
----------------------------------------------------------------
Minnesota Fund - Class C 2 -6.18% 3.48%
Lehman Brothers Municipal Bond -2.06% 5.84%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 3.27% 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 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]
6.64% 10.95% 8.98% 12.47% -4.48% 14.34% 4.47% 8.16% 5.94% -3.00%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------
Ohio Fund - Class A 2 -7.15% 4.91% 5.82%
Lehman Brothers Municipal Bond -2.06% 6.91% 6.89%
Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
-------------------------------------------------------------------
Ohio Fund - Class C 2 -5.35% 4.18%
Lehman Brothers Municipal Bond -2.06% 5.84%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the Fund's year-to-date return was 2.95% 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 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)
MASSA-
ARIZONA FLORIDA INSURED CHUSETTS MICHIGAN MINNESOTA OHIO
CLASS A FUND FUND FUND FUND FUND FUND FUND
----------------------------------------------------------------------
Maximum sales
charge
(load) as a
percentage
of offering 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
price
Load imposed on
purchases 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred
sales charge NONE NONE NONE NONE NONE NONE NONE
(load) 1
CLASS B 2
--------------------------------------------------------------------
Maximum sales
charge
(load) as a
percentage
of offering - - 4.00% - 4.00% - 4.00%
price
Load imposed on
purchases - - NONE - NONE - NONE
Maximum deferred
sales charge - - 4.00% - 4.00% - 4.00%
(load) 3
CLASS C
--------------------------------------------------------------------
Maximum sales
charge
(load) as a
percentage
of offering - - 1.99% 1.99% 1.99% 1.99% 1.99%
price
Load imposed on
purchases - - 1.00% 1.00% 1.00% 1.00% 1.00%
Maximum deferred
sales charge - - 0.99% 0.99% 0.99% 0.99% 0.99%
(load) 4
Please see "Choosing a Share Class" on page 30 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
MASSA-
ARIZONA FLORIDA INSURED CHUSETTS MICHIGAN MINNESOTA OHIO
CLASS A FUND FUND FUND FUND FUND FUND FUND
----------------------------------------------------------------------
Management fees 0.62% 0.60%5 0.46% 0.52% 0.47% 0.50% 0.48%
Distribution and
service (12b-1) 0.10% 0.10% 0.09% 0.09% 0.09% 0.09% 0.09%
fees
Other expenses 0.09% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07%
----------------------------------------------------
Total annual
Fund
operating 0.81% 0.77%5 0.62% 0.68% 0.63% 0.66% 0.64%
expenses
====================================================
CLASS B 2
----------------------------------------------------------------------
Management fees - - 0.46% - 0.47% - 0.48%
Distribution and
service
(12b-1) fees - - 0.65% - 0.65% - 0.65%
Other expenses - - 0.07% - 0.07% - 0.07%
----------------------------------------------------
Total annual
Fund
operating - - 1.18% - 1.19% - 1.20%
expenses
=====================================================
CLASS C
----------------------------------------------------------------------
Management fees - - 0.46% 0.52% 0.47% 0.50% 0.48%
Distribution and
service
(12b-1 fees) - - 0.65% 0.65% 0.65% 0.65% 0.65%
Other expenses - - 0.07% 0.07% 0.07% 0.07% 0.07%
----------------------------------------------------
Total annual
Fund
operating - - 1.18% 1.24% 1.19% 1.22% 1.20%
expenses
====================================================
1. Except for investments of $1 million or more (see page 30).
2. The Insured, Michigan and Ohio Funds began offering Class B shares on
February 1, 2000. Total annual Fund operating expenses are annualized.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended February 29, 2000, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.59% and total annual Fund operating expenses were 0.76%. The manager
may end this arrangement at any time upon notice to the Fund's Board of
Trustees.
EXAMPLE
This example can help you compare the cost of investing in a Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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:
MASSA-
ARIZONA FLORIDA INSURED CHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
---------------------------------------------------------------------
If you sell your shares
at the end of the period:
CLASS A
1 Year 1 $504 $500 $486 $492 $487 $490 $488
3 Years $673 $661 $615 $633 $618 $627 $621
5 Years $856 $835 $756 $788 $761 $777 $767
10 Years $1,384 $1,339 $1,166 $1,236 $1,178 $1,213 $1,189
CLASS B
1 Year - - $520 - $521 - $522
3 Years - - $675 - $678 - $681
5 Years - - $849 - $854 - $860
10 Years 2 - - $1,276 - $1,287 - $1,299
CLASS C
1 Year - - $318 $324 $319 $322 $320
3 Years - - $471 $489 $474 $483 $477
5 Years - - $743 $774 $748 $764 $753
10 Years - - $1,517 $1,585 $1,529 $1,563 $1,540
MASSA-
ARIZONA FLORIDA INSURED CHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
---------------------------------------------------------------------
If you do not sell your shares:
CLASS B
1 Year - - $120 - $121 - $122
3 Years - - $375 - $378 - $381
5 Years - - $649 - $654 - $660
10 Years2 - - $1,276 - $1,287 - $1,299
CLASS C
1 Year - - $219 $225 $220 $223 $221
3 Years - - $471 $489 $474 $483 $477
5 Years - - $743 $774 $748 $764 $753
10 Years - - $1,517 $1,585 $1,529 $1,563 $1,540
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.
[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 $225 billion in assets.
The team responsible for the Funds' management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso 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. She is the co-Director of Franklin's
Municipal Bond Department. She joined Franklin Templeton Investments in 1986.
JAMES CONN, VICE PRESIDENT OF ADVISERS
Mr. Conn has been an analyst or portfolio manager of the Insured,
Massachusetts, Michigan, Minnesota and Ohio Funds since December 1999. He
joined Franklin Templeton Investments in 1996. Previously, he was a portfolio
manager with California Investment Trust.
CARRIE HIGGINS, VICE PRESIDENT OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the Arizona Fund
since its inception. She joined Franklin Templeton Investments in 1990.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the Insured,
Massachusetts, Michigan, Minnesota and Ohio Funds since 1989. He joined
Franklin Templeton Investments 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 Franklin Templeton Investments in 1994.
CHRISTOPHER SPERRY, PORTFOLIO MANAGER OF ADVISERS
Mr. Sperry has been an analyst or portfolio manager of the Arizona and
Florida Funds since February 2000. He joined Franklin Templeton Investments
in 1996.
STELLA S. 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 Franklin Templeton
Investments in 1986.
Each Fund pays Advisers a fee for managing the Fund's assets. For the fiscal
year ended February 29, 2000, the Funds paid to the manager for its services
the following management fees:
MANAGEMENT
FEES
(as a percentage of
average monthly
assets)
-------------------------------------------------------------
Arizona Fund 0.62%
Florida Fund 1 0.59%
Insured Fund 0.46%
Massachusetts Fund 0.52%
Michigan Fund 0.47%
Minnesota Fund 0.50%
Ohio Fund 0.48%
1. Management fees, before any advance waiver, were 0.60% of the Florida
Fund's average net assets. Under an agreement by the manager to limit its
fees, the Florida Fund paid the management fees shown. The manager may end
this arrangement at any time upon notice to the Fund's Board of Trustees.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN 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. Distributions that qualify as capital gain
dividends for federal income tax purposes 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 redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, 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.
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 29,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 10.84 10.77 10.36 10.36 9.80
year
Net investment income .48 .53 .54 .55 .55
-----------------------------------
Net realized and unrealized
gains (losses) (.99) .07 .42 - .57
-----------------------------------
Total from investment (.51) .60 .96 .55 1.12
operations
-----------------------------------
Distributions from net (.49)2 (.53) (.55) (.55) (.56)
investment income
-----------------------------------
Net asset value, end of year 9.84 10.84 10.77 10.36 10.36
===================================
Total return (%) 3 (4.68) 5.75 9.53 5.55 11.64
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 72,517 80,68458,05939,693 38,199
1,000)
Ratios to average net assets:
(%)
Expenses .81 .37 .30 .25 .16
Expenses excluding waiver
and payments by affiliate .81 .84 .82 .86 .86
Net investment income 4.67 4.87 5.11 5.45 5.51
Portfolio turnover rate (%) 33.46 10.68 17.44 18.27 4.12
1. Based on average shares outstanding effective February 29, 2000.
2. Includes distributions in excess of net investment income in the amount of
$.001.
3. Total return does not include sales charges.
FLORIDA FUND YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 10.53 10.43 9.99 10.02 9.53
year
-----------------------------------
Net investment income .48 .51 .53 .53 .53
-----------------------------------
Net realized and unrealized
gains (losses) (.92) .10 .44 (.03) .49
-----------------------------------
Total from investment (.44) .61 .97 .50 1.02
operations
-----------------------------------
Distributions from net (.48) (.51) (.53) (.53) (.53)
investment income
-----------------------------------
Net asset value, end of year 9.61 10.53 10.43 9.99 10.02
===================================
Total return (%) 2 (4.22) 6.01 9.94 5.17 10.95
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 108,831 124,488 101,506 77,177 69,583
1,000)
Ratios to average net assets:
(%)
Expenses .76 .42 .35 .35 .35
Expenses excluding waiver
and payments by affiliate .77 .79 .80 .80 .82
Net investment income 4.79 4.88 5.16 5.36 5.37
Portfolio turnover rate (%) 23.92 1.81 8.08 32.23 24.36
1. Based on average shares outstanding effective February 29, 2000.
2. Total return does not include sales charges.
INSURED FUND
CLASS A YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.26 12.31 12.15 12.27 11.97
year
-----------------------------------
Net investment income .61 .63 .66 .69 .71
Net realized and unrealized
gains (losses) (1.00) .06 .29 (.11) .30
-----------------------------------
Total from investment (.39) .69 .95 .58 1.01
operations
-----------------------------------
Less distributions from:
Net investment income (.61)4 (.63) (.66) (.70) (.71)
In excess of net investment - (.01) (.01) - -
income
Net realized gains (.02) (.10) (.12) - -
-----------------------------------
Total distributions (.63) (.74) (.79) (.70) (.71)
-----------------------------------
Net asset value, end of year 11.24 12.26 12.31 12.15 12.27
===================================
Total return (%) 5 (3.21) 5.72 8.09 4.88 8.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1 1,446 1,727 1,685 1,662 1,705
million)
Ratios to average net assets:
(%)
Expenses .62 .62 .61 .60 .60
Net investment income 5.23 5.11 5.44 5.68 5.81
Portfolio turnover rate (%) 13.29 13.16 27.77 18.66 13.52
CLASS B
PER SHARE DATA 1 ($)
Net asset value, beginning of 11.14
period
-----------------------------------
Net investment income .05
Net realized and unrealized
gains (losses) .10
-----------------------------------
Total from investment .15
operations
-----------------------------------
Distributions from net (.05)
investment income
-----------------------------------
Net asset value, end of period 11.24
===================================
Total return (%) 5 1.31
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 63
1,000)
Ratios to average net assets:
(%)
Expenses 1.18 6
Net investment income 5.23 6
Portfolio turnover rate (%) 13.29
INSURED FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.33 12.38 12.21 12.31 11.98
year
-----------------------------------
Net investment income .55 .57 .60 .62 .54
Net realized and unrealized
gains (losses) (1.00) .05 .29 (.09) .32
-----------------------------------
Total from investment (.45) .62 .89 .53 .86
operations
-----------------------------------
Distributions from net (.55)4 (.57)7(.60) (.63) (.53)
investment income
-----------------------------------
Distributions from net (.02) (.10) (.12) - -
realized gains
-----------------------------------
Total distributions (.57) (.67) (.72) (.63) (.53)
-----------------------------------
Net asset value, end of year 11.31 12.33 12.38 12.21 12.31
===================================
Total return (%) 5 (3.74) 5.12 7.52 4.42 7.32
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 56,627 65,16638,057 21,521 8,152
1,000)
Ratios to average net assets:
(%)
Expenses 1.18 1.18 1.18 1.17 1.18 6
Net investment income 4.66 4.54 4.86 5.10 5.21 6
Portfolio turnover rate (%) 13.29 13.16 27.77 18.66 13.52
1. Based on average shares outstanding effective February 29, 2000.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
4. Includes distributions in excess of net investment income in the amount of
$.001.
5. Total return does not include sales charges, and is not annualized.
6. Annualized.
7. Includes distributions in excess of net investment income in the amount of
$.004.
MASSACHUSETTS FUND
CLASS A YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 1999 1998 1997 1996 2
-------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 11.71 11.75 11.54 11.65 11.34
year
-----------------------------------
Net investment income .58 .59 .61 .63 .66
Net realized and unrealized
gains (losses) (.96) .03 .35 (.10) .31
-----------------------------------
Total from investment (.38) .62 .96 .53 .97
operations
-----------------------------------
Less distributions from:
Net investment income (.58) (.59) (.61) (.64)3 (.66)
In excess of net investment - - (.01) -
income
Net realized gains - (.07) (.13) - -
-----------------------------------
Total distributions (.58) (.66) (.75) (.64) (.66)
-----------------------------------
Net asset value, end of year 10.75 11.71 11.75 11.54 11.65
===================================
Total return (%) 4 (3.34) 5.36 8.50 4.75 8.80
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 306,531 340,109 328,147 325,065 301,529
1,000)
Ratios to average net assets:
(%)
Expenses .68 .68 .68 .68 .69
Net investment income 5.16 4.99 5.21 5.51 5.67
Portfolio turnover rate (%) 25.75 6.80 30.46 29.22 10.29
MASSACHUSETTS FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 1999 1998 1997 1996 2
-------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 11.76 11.80 11.59 11.69 11.36
year
-----------------------------------
Net investment income .52 .52 .55 .57 .50
Net realized and unrealized
gains (losses) (.96) .03 .34 (.09) .32
-----------------------------------
Total from investment (.44) .55 .89 .48 .82
operations
-----------------------------------
Distributions from net (.51) (.52) (.55) (.58)3 (.49)
investment income
-----------------------------------
Distributions from net - (.07) (.13) - -
realized gains
-----------------------------------
Total distributions (.51) (.59) (.68) (.58) (.49)
Net asset value, end of year 10.81 11.76 11.80 11.59 11.69
===================================
Total return (%) 4 (3.78) 4.74 7.86 4.22 7.36
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 27,253 26,27113,937 6,378 2,759
1,000)
Ratios to average net assets:
(%)
Expenses 1.24 1.24 1.25 1.25 1.26 5
Net investment income 4.60 4.44 4.59 4.96 5.06 5
Portfolio turnover rate (%) 25.75 6.80 30.46 29.22 10.29
1. Based on average shares outstanding effective February 29, 2000.
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
$.001.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
MICHIGAN FUND
CLASS A YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.28 12.20 12.00 12.09 11.76
year
-----------------------------------
Net investment income .60 .61 .63 .66 .68
Net realized and unrealized
gains (losses) (.91) .13 .34 (.09) .34
-----------------------------------
Total from investment (.31) .74 .97 .57 1.02
operations
-----------------------------------
Less distributions from:
Net investment income (.60) (.61) (.63) (.66) 4 (.69)5
-----------------------------------
In excess of net investment - - (.01) - -
income
Net realized gains -6 (.05) (.13) - -
Total distributions (.60) (.66) (.77) (.66) (.69)
Net asset value, end of year 11.37 12.28 12.20 12.00 12.09
===================================
Total return (%) 7 (2.57) 6.23 8.37 4.90 8.86
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1 1,058 1,161 1,143 1,112 1,115
million)
Ratios to average net assets:
(%)
Expenses .63 .63 .63 .62 .62
Net investment income 5.10 4.98 5.24 5.52 5.65
Portfolio turnover rate (%) 13.73 7.37 20.08 30.03 9.38
MICHIGAN FUND (CONT.)
CLASS B YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
-------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 11.31
period
-----------------------------------
Net investment income .05
Net realized and unrealized .07
gains
-----------------------------------
Total from investment .12
operations
-----------------------------------
Distributions from net (.05)
investment income
-----------------------------------
Net asset value, end of period 11.38
===================================
Total return (%) 1.11
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 228
1,000)
Ratios to average net assets:
(%)
Expenses 1.19 8
Net investment income 4.88 8
Portfolio turnover rate (%) 13.73
CLASS C
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.36 12.27 12.07 12.14 11.77
year
-----------------------------------
Net investment income .54 .55 .57 .59 .51
Net realized and unrealized
gains (losses) (.92) .13 .33 (.07) .37
-----------------------------------
Total from investment (.38) .68 .90 .52 .88
operations
-----------------------------------
Distributions from net (.53) (.54) (.57) (.59) (.51)
investment income
Distributions from net -6 (.05) (.13) - -
realized gains
-----------------------------------
Total distributions (.53) (.59) (.70) (.59) (.51)
-----------------------------------
Net asset value, end of year 11.45 12.36 12.27 12.07 12.14
===================================
Total return (%) 7 (3.11) 5.71 7.70 4.44 7.58
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 49,038 49,970 32,873 20,162 6,683
1,000)
Ratios to average net assets:
(%)
Expenses 1.19 1.19 1.20 1.19 1.20 8
Net investment income 4.54 4.42 4.67 4.94 5.03 8
Portfolio turnover rate (%) 13.73 7.37 20.08 30.03 9.38
1. Based on average shares outstanding effective February 29, 2000.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
4. Includes distributions in excess of net investment income in the amount of
$.002.
5. Includes distributions in excess of net investment income in the amount of
$.001.
6. The Fund made a capital gain distribution of $.0003.
7. Total return does not include sales charges, and is not annualized.
8. Annualized.
MINNESOTA FUND
CLASS A YEAR ENDED FEBRUARY 29,
-------------------------------------------------------------------
2000 1999 1998 1997 1996 2
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.14 12.16 12.01 12.14 11.88
year
-----------------------------------
Net investment income .59 .61 .64 .65 .67
Net realized and unrealized
gains (losses) (.99) .01 .25 (.12) .27
-----------------------------------
Total from investment (.40) .62 .89 .53 .94
operations
-----------------------------------
Distributions from net (.59)3 (.62)4(.64) (.66) (.68)
investment income
Distributions from net (.02) (.02) (.10) - -
realized gains
-----------------------------------
Total distributions (.61) (.64) (.74) (.66) (.68)
-----------------------------------
Net asset value, end of year 11.13 12.14 12.16 12.01 12.14
===================================
Total return (%) 5 (3.30) 5.18 7.60 4.54 8.06
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 451,142 515,174 495,315 482,128 492,139
1,000)
Ratios to average net assets:
(%)
Expenses .66 .67 .65 .66 .66
Net investment income 5.05 5.01 5.29 5.47 5.58
Portfolio turnover rate (%) 15.79 16.25 14.87 14.40 17.72
CLASS C
-------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 12.19 12.21 12.05 12.17 11.89
year
-----------------------------------
Net investment income .52 .54 .57 .59 .50
Net realized and unrealized
gains (losses) (.98) .01 .26 (.12) .28
-----------------------------------
Total from investment (.46) .55 .83 .47 .78
operations
-----------------------------------
Distributions from net (.53)6 (.55)4(.57) (.59) (.50)
investment income
-----------------------------------
Distributions from net (.02) (.02) (.10) - -
realized gains
-----------------------------------
Total distributions (.55) (.57) (.67) (.59) (.50)
-----------------------------------
Net asset value, end of year 11.18 12.19 12.21 12.05 12.17
===================================
Total return (%) 5 (3.84) 4.58 7.04 3.98 6.67
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 21,828 20,89610,131 4,844 1,152
1,000)
Ratios to average net assets:
(%)
Expenses 1.22 1.23 1.22 1.23 1.25 7
Net investment income 4.50 4.44 4.72 4.87 4.94 7
Portfolio turnover rate (%) 15.79 16.25 14.87 14.40 17.72
1. Based on average shares outstanding effective February 29, 2000.
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. Includes distributions in excess of net investment income in the amount of
$.001.
5. Total return does not include sales charges, and is not annualized.
6. Includes distributions in excess of net investment income in the amount of
$.007.
7. Annualized.
OHIO FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
--------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 12.49 12.45 12.19 12.22 11.90
year
------------------------------------
Net investment income .61 .62 .64 .66 .68
Net realized and unrealized
gains (losses) (.95) .07 .33 (.03) .33
------------------------------------
Total from investment (.34) .69 .97 .63 1.01
operations
------------------------------------
Distributions from net (.61) 4 (.62) (.64)5 (.66)6 (.69) 7
investment income
Distributions from net (.02) (.03) (.07) - -
realized gains
------------------------------------
Total distributions (.63) (.65) (.71) (.66) (.69)
------------------------------------
Net asset value, end of year 11.52 12.49 12.45 12.19 12.22
====================================
Total return (%) 8 (2.80) 5.63 8.22 5.35 8.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 689,084 776,592 741,079 698,360 685,783
1,000)
Ratios to average net assets:
(%)
Expenses .64 .65 .64 .64 .64
Net investment income 5.07 4.98 5.24 5.43 5.58
Portfolio turnover rate (%) 9.61 6.56 12.84 14.95 11.47
CLASS B
--------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value, beginning of 11.43
period
------------------------------------
Net investment income .05
Net realized and unrealized
gains (losses) .09
------------------------------------
Total from investment .14
operations
------------------------------------
Distributions from net (.05)
investment income
------------------------------------
Net asset value, end of period 11.52
====================================
Total return (%) 8 1.19
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($ x 76
1,000)
Ratios to average net assets:
(%)
Expenses 1.20 9
Net investment income 5.02 9
Portfolio turnover rate (%) 9.61
OHIO FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------
2000 2 1999 1998 1997 1996 3
--------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value, beginning of 12.56 12.51 12.24 12.26 11.90
year
------------------------------------
Net investment income .54 .55 .58 .59 .52
Net realized and unrealized
gains (losses) (.96) .08 .34 (.02) .35
------------------------------------
Total from investment (.42) .63 .92 .57 .87
operations
------------------------------------
Distributions from net (.54) 4 (.55) (.58) (.59) (.51)
investment income
Distributions from net (.02) (.03) (.07) - -
realized gains
------------------------------------
Total distributions (.56) (.58) (.65) (.59) (.51)
------------------------------------
Net asset value, end of year 11.58 12.56 12.51 12.24 12.26
====================================
Total return (%) 8 (3.41) 5.10 7.66 4.79 7.43
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 40,181 42,258 28,178 15,786 6,085
1,000)
Ratios to average net assets:
(%)
Expenses 1.20 1.21 1.20 1.20 1.22 9
Net investment income 4.52 4.42 4.67 4.80 4.99 9
Portfolio turnover rate (%) 9.61 6.56 12.84 14.95 11.47
1. Based on average shares outstanding effective February 29, 2000.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
4. Includes distributions in excess of net investment income in the amount of
$.002.
5. Includes distributions in excess of net investment income in the amount of
$.007.
6. Includes distributions in excess of net investment income in the amount of
$.003.
7. Includes distributions in excess of net investment income in the amount of
$.001.
8. Total return does not include sales charges, and is not annualized.
9. 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 B (INSURED, CLASS C (ALL FUNDS
MICHIGAN EXCEPT
AND OHIO FUNDS ONLY) ARIZONA AND FLORIDA)
----------------------------------------------------------------------
o Initial sales o No initial o Initial sales
charge of 4.25% or sales charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining
to 1% within six
years and
eliminated after
that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than expenses than
B or C due to lower Class A (same as Class A (same as
distribution fees Class C) due to Class B) due to
higher higher
distribution distribution fees.
fees. Automatic No conversion to
conversion to Class A shares, so
Class A shares annual expenses do
after eight not decrease.
years, reducing
future annual
expenses.
THE INSURED, MICHIGAN AND OHIO FUNDS BEGAN OFFERING CLASS B SHARES
ON FEBRUARY 1, 2000.
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 33), 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 32).
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 0.15% 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 B
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 32). 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 each 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.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS OF THE OFFERING OF YOUR NET
AMOUNT PRICE 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 each 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 38 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 Franklin Templeton funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
FRANKLIN TEMPLETON FUNDS include all U.S. registered mutual funds of Franklin
Templeton Investments, except Franklin Templeton Variable Insurance Products
Trust and Templeton Capital Accumulator Fund, Inc.
[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. Certain
investors also may buy Class C shares without an initial sales charge. The
CDSC for each class 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
------------------------------------------------------------------
Automatic investment plans $50 $50
------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
------------------------------------------------------------------
Broker-dealer sponsored wrap account $250 $50
programs
------------------------------------------------------------------
Full-time employees, officers, trustees and $100 $50
directors of Franklin Templeton entities,
and their immediate family members
------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
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 "Investor Services" on page 37). For example, if you would
like to link one of your bank accounts to your Fund account so that you may
use electronic fund transfers to and from your bank account to buy and sell
shares, please complete the bank information section of the application. We
will keep your bank information on file for future purchases and redemptions.
BUYING SHARES
----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
----------------------------------------------------------------------
[Insert graphic of If you have another Before requesting a
phone] Franklin Templeton telephone purchase,
fund account with please make sure we
BY PHONE your bank account have your bank
information on file, account information
(Up to $100,000 you may open a new on file. If we do not
per day) account by phone. The have this
1-800/632-2301 accounts must be information, you will
identically need to send written
registered. instructions with
your bank's name and
To make a same day address, a voided
investment, please check or savings
call us by 1:00 p.m. account deposit slip,
Pacific time or the and a signature
close of the New York guarantee if the
Stock Exchange, ownership of the bank
whichever is earlier. and Fund accounts is
different.
To make a same day
investment, please
call us by 1:00 p.m.
Pacific time or the
close of the New York
Stock Exchange,
whichever is earlier.
----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to the Fund. payable to the Fund.
Include your account
BY MAIL 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
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by
collect) 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
signed written automated TeleFACTS
BY EXCHANGE instructions. The system, or send
TeleFACTS system signed written
TeleFACTS(R) cannot be used to instructions.
1-800/247-1753 open a new account.
(around-the-clock (Please see page 38
access) (Please see page 38 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 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. To sign up, complete the
appropriate section of your account application and mail it to Investor
Services. If you are opening a new account, please include the minimum
initial investment of $50 with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically 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 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 buy, 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. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one
signature for all transactions. This type of telephone exchange is available
as long as you have telephone exchange privileges on your account.
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 purchase, 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.
*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.
Because excessive trading can hurt Fund performance, operations and
shareholders, each Fund, effective September 15, 2000, reserves the right to
revise or terminate the exchange privilege, limit the amount or number of
exchanges, reject any exchange, or restrict or refuse purchases if (i) the
Fund or its manager believes the Fund would be harmed or unable to invest
effectively, or (ii) the Fund receives or anticipates simultaneous orders
that may significantly affect the Fund (please see "Market Timers" on page
43).
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. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
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 Contact your investment representative
of hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
----------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or
BY MAIL 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 As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and you
have not changed your address by phone within the
BY PHONE 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 You can call or write to have redemption proceeds
of three sent to a bank account. See the policies above
lightning bolts] for selling shares by mail or phone.
BY ELECTRONIC Before requesting to have redemption proceeds
FUNDS TRANSFER sent to a bank account, please make sure we have
(ACH) 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, a voided check or savings account
deposit slip, and a signature guarantee if the
ownership of the bank and Fund accounts is
different.
If we receive your request in proper form by 1:00
p.m. Pacific time, proceeds sent by ACH generally
will be available within two to three business
days.
----------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you are
of two arrows considering.
pointing in
opposite Call Shareholder Services at the number below or
directions] our automated TeleFACTS system, or send signed
written instructions. See the policies above for
BY EXCHANGE selling shares by mail or phone.
TeleFACTS(R) If you hold share certificates, you will need to
1-800/247-1753 return them to the Fund before your exchange can
(around-the-clock be processed.
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 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 quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). 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 copies of all notifications and
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. The remaining Funds do not allow investments by market timers. You
may be considered a Market Timer if you have (i) requested an exchange out of
any of the Franklin Templeton funds within two weeks of an earlier exchange
request out of any Fund, or (ii) exchanged shares out of any of the Franklin
Templeton funds more than twice within a rolling 90 day period, or (iii)
otherwise seem to follow a market timing pattern that may adversely affect
the Fund. Accounts under common ownership or control with an account that is
covered by (i), (ii), or (iii) are also subject to these limits.
Anyone, including the shareholder or the shareholder's agent, who is
considered to be a Market Timer by the Fund, its manager or shareholder
services agent, will be issued a written notice of their status and the
Fund's policies. Identified Market Timers will be required to register with
the market timing desk of Franklin Templeton Investor Services, Inc., and to
place all purchase and exchange trade requests through the desk.
ADDITIONAL POLICIES Please note that the Funds maintain additional policies
and reserve certain rights, including:
o The Funds may restrict or 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 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, wire or electronic funds transfer
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 B 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 0.15 0.15 2 0.65 3
(Arizona and
Florida Funds)
0.10
(all other
Funds)
A dealer commission of up to 1% may be paid on Class C NAV purchases. 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.
MARKET TIMERS. Please note that for Class A NAV purchases by market timers,
including purchases of $1 million or more, dealers are not eligible to
receive the dealer commission. Dealers, however, may be eligible to receive
the 12b-1 fee from the date of purchase.
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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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
franklintempleton.com
You also can obtain information about each Fund by visiting
the SEC's Public Reference Room in Washington, D.C. (phone
1-202/942-8090) or the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the following E-mail
address: publicinfo(R)sec.gov.
Investment Company Act file #811-4149 TF1 P 07/00
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, 2000
[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
22 Management
24 Distributions and Taxes
26 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
37 Choosing a Share Class
41 Buying Shares
44 Investor Services
47 Selling Shares
49 Account Policies
52 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 that Fund's state.
MAIN INVESTMENT STRATEGIES Under normal market conditions, each Fund invests
predominately in municipal securities whose interest is free from federal income
taxes, including the federal alternative minimum tax. In addition, each state
Fund invests predominately in municipal securities that pay interest free from
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, including interest that may be subject to the federal alternative
minimum tax.
[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. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (the "principal") be repaid at maturity. [End callout]
Each Fund only buys municipal 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 When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, a
Fund may be unable to achieve its investment goal.
[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 An issuer of municipal securities may 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. 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. To the extent that 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. A Fund might also be adversely impacted by the inability of an
insurer to meet its insurance obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of a
Fund's distributions, its yield, and the value of your investment in that 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 rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may 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, a 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. A call of some or all of these securities may
lower a 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 rise.
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 their shares. The Fund, however,
intend 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 state Fund invests predominately 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.
More detailed information about the Funds, their policies and risks and about
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 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]
5.29% 12.40% 8.79% 12.24% -4.44% 15.28% 4.95% 9.03% 3.42% -3.60%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Alabama Fund - Class A 2 -7.70% 4.72% 5.69%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Alabama Fund - Class C 2 -6.01% 3.85%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.61% 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 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]
6.08% 12.56% 8.81% 12.01% -3.34% 14.67% 4.39% 8.11% 6.34% -3.31%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Florida Fund - Class A 2 -7.42% 4.97% 6.01%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Florida Fund - Class C 2 -5.60 4.27%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.54% 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 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]
5.65% 12.23% 8.82% 11.89% -3.74% 14.06% 4.66% 7.84% 5.63% -3.82%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95
5.84%
WORST QUARTER:
Q1 '94
-4.26%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Georgia Fund - Class A 2 -7.92% 4.61% 5.69%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Georgia Fund - Class C 2 -6.19% 3.85%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.87% 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 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% -4.23%
------------------------------------------------------------------------------
92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS SINCE
INCEPTION
(10/12/91)
-------------------------------------------------------------------------------
Kentucky Fund 2 -8.29% 5.86% 5.60%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.42%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 3.00% 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 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]
6.50% 12.23% 8.98% 11.13% -4.80% 14.59% 4.83% 8.79% 5.39% -3.87%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95
5.84%
WORST QUARTER:
Q1 '94
-4.47%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
------------------------------------------------------------------------------
Louisiana Fund - Class A 2 -7.98% 4.86% 5.74%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Louisiana Fund - Class C 2 -6.18% 4.14%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.88% 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 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]
5.41% 12.06% 8.87% 12.15% -5.09% 17.27% 3.96% 8.54% 5.88% -3.81%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Maryland Fund - Class A 2 -7.91% 5.23% 5.86%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Maryland Fund - Class C 2 -6.19% 4.33%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.80% 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 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]
6.66% 11.97% 9.02% 13.28% -5.09% 15.68% 4.70% 9.14% 5.76% -4.31%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Missouri Fund - Class A 2 -8.36% 5.07% 6.02%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Missouri Fund - Class C 2 -6.66% 4.16%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.78% 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 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]
6.33% 11.50% 9.12% 11.67% -5.73% 16.12% 4.08% 8.91% 5.94% -4.23%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
North Carolina Fund - Class A 2 -8.29% 5.04% 5.70%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
North Carolina Fund - Class C 2 -6.65% 4.07%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.77% 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 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]
6.04% 12.14% 8.56% 11.59% -2.79% 13.32% 5.17% 9.10% 5.10% -4.50%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95
4.96%
WORST QUARTER:
Q1 '94
-3.48%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Texas Fund - Class A 2 -8.57% 4.56% 5.75%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Texas Fund - Class C 2 -6.85% 4.14%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 1.66% 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 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]
5.91% 12.53% 8.95% 12.40% -4.64% 15.45% 4.17% 8.50% 5.83% -4.09%
------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
[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, 1999
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
Virginia Fund - Class A 2 -8.18% 4.87% 5.85%
Lehman Brothers Municipal Bond Index 3 -2.06% 6.91% 6.89%
1 YEAR SINCE
INCEPTION
(5/1/95)
-------------------------------------------------------------------------------
Virginia Fund - Class C 2 -6.53% 4.03%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 3.17% 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 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
CLASS A FUND FUND FUND FUND FUND
-------------------------------------------------------------------------------
Maximum sales charge (load) 4.25% 4.25% 4.25% 4.25% 4.25%
as a percentage of offering
price
Load imposed on purchases 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred sales charge None None None None None
(load) 1
Exchange fee None None None None None
CLASS B 2
-------------------------------------------------------------------------------
Maximum sales charge (load) - 4.00% - - -
as a percentage of offering
price
Load imposed on purchases - None - - -
Maximum deferred sales charge - 4.00% - - -
(load) 3
Exchange fee - None - - -
CLASS C
-------------------------------------------------------------------------------
Maximum sales charge (load) 1.99% 1.99% 1.99% - 1.99%
as a percentage of offering
price
Load imposed on purchases 1.00% 1.00% 1.00% - 1.00%
Maximum deferred sales charge 0.99% 0.99% 0.99% - 0.99%
(load) 4
Exchange fee None None None None None
MARYLAND MISSOURI NORTH TEXAS VIRGINIA
FUND FUND CAROLINA FUND FUND
CLASS A FUND
-------------------------------------------------------------------------------
Maximum sales charge (load) 4.25% 4.25% 4.25% 4.25% 4.25%
as a percentage of offering
price
Load imposed on purchases 4.25% 4.25% 4.25% 4.25% 4.25%
Maximum deferred sales charge None None None None None
(load) 1
Exchange fee None None None None None
CLASS C
-------------------------------------------------------------------------------
Maximum sales charge (load) 1.99% 1.99% 1.99% 1.99% 1.99%
as a percentage of offering
price
Load imposed on purchases 1.00% 1.00% 1.00% 1.00% 1.00%
Maximum deferred sales charge 0.99% 0.99% 0.99% 0.99% 0.99%
(load) 4
Exchange fee None None None None None
Please see "Choosing a Share Class" on page 36 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
CLASS A FUND FUND FUND FUND FUND
-------------------------------------------------------------------------------
Management fees 0.55% 0.46% 0.57% 0.63%5 0.57%
Distribution and service 0.10% 0.10% 0.10% 0.10% 0.10%
(12b-1) fees
Other expenses 0.07% 0.06% 0.08% 0.08% 0.07%
----------------------------------------------
Total annual Fund operating 0.72% 0.62% 0.75% 0.81%5 0.74%
expenses ----------------------------------------------
CLASS B 2
-------------------------------------------------------------------------------
Management fees - 0.46% - - -
Distribution and service - 0.65% - - -
(12b-1) fees
Other expenses - 0.06% - - -
----------------------------------------------
Total annual Fund operating - 1.17% - - -
expenses ----------------------------------------------
CLASS C
-------------------------------------------------------------------------------
Management fees 0.55% 0.46% 0.57% - 0.57%
Distribution and service 0.65% 0.65% 0.65% - 0.65%
(12b-1) fees
Other expenses 0.07% 0.06% 0.08% - 0.07%
----------------------------------------------
Total annual Fund operating 1.27% 1.17% 1.30% - 1.29%
expenses ----------------------------------------------
MARYLAND MISSOURI NORTH TEXAS VIRGINIA
FUND FUND CAROLINA FUND FUND
CLASS A FUND
-------------------------------------------------------------------------------
Management fees 0.54% 0.51% 0.51% 0.60% 0.51%
Distribution and service 0.10% 0.10% 0.10% 0.09% 0.10%
(12b-1) fees
Other expenses 0.08% 0.08% 0.07% 0.09% 0.07%
---------------------------------------------
Total annual Fund operating 0.72% 0.69% 0.68% 0.78% 0.68%
expenses ---------------------------------------------
CLASS C
-------------------------------------------------------------------------------
Management fees 0.54% 0.51% 0.51% 0.60% 0.51%
Distribution and service 0.65% 0.65% 0.65% 0.65% 0.65%
(12b-1) fees
Other expenses 0.08% 0.08% 0.07% 0.09% 0.07%
---------------------------------------------
Total annual Fund operating 1.27% 1.24% 1.23% 1.34% 1.23%
expenses ---------------------------------------------
1. Except for investments of $1 million or more (see page 36).
2. The Fund began offering Class B shares on February 1, 2000. Annual Fund
operating expenses for Class B are annualized.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended February 29, 2000, the manager had agreed in
advance to limit its management fees. With this reduction, management fees were
0.27% and total annual Fund operating expenses were 0.45% for Class A. The
manager may end this arrangement at any time upon notice to the Fund's Board
of Trustees.
EXAMPLE
This example can help you compare the cost of investing in a Fund with the cost
of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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
----------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A
1 Year 1 $495 $486 $498 $504 $497
3 Years $645 $615 $654 $673 $651
5 Years $809 $756 $824 $856 $819
10 Years $1,281 $1,166 $1,316 $1,384 $1,304
CLASS B
1 Year - $519 - - -
3 Years - $672 - - -
5 Years - $844 - - -
10 Years 2 - $1,267 - - -
CLASS C
1 Year $327 $317 $330 - $329
3 Years $499 $468 $508 - $505
5 Years $790 $737 $806 - $800
10 Years $1,619 $1,506 $1,652 - $1,641
If you do not sell your shares:
CLASS B
1 Year - $119 - - -
3 Years - $372 - - -
5 Years - $644 - - -
10 Years 2 - $1,267 - - -
CLASS C
1 Year $228 $218 $231 - $230
3 Years $499 $468 $508 - $505
5 Years $790 $737 $806 - $800
10 Years $1,619 $1,506 $1,652 - $1,641
MARYLAND MISSOURI NORTH TEXAS VIRGINIA
FUND FUND CAROLINA FUND FUND
FUND
-----------------------------------------------------------------------
CLASS A
1 Year 1 $495 $492 $492 $501 $492
3 Years $645 $636 $633 $664 $633
5 Years $809 $793 $788 $840 $788
10 Years $1,281 $1,247 $1,236 $1,350 $1,236
CLASS C
1 Year $327 $324 $323 $334 $323
3 Years $499 $489 $486 $520 $486
5 Years $790 $774 $769 $827 $769
10 Years $1,619 $1,585 $1,574 $1,697 $1,574
If you do not sell your shares:
CLASS C
1 Year $228 $225 $224 $235 $224
3 Years $499 $489 $486 $520 $486
5 Years $790 $774 $769 $827 $769
10 Years $1,619 $1,585 $1,574 $1,697 $1,574
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.
[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 $225 billion in assets.
The team responsible for the Funds' management is:
SHEILA AMOROSO SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of each Fund since its
inception. She is the co-Director of Franklin's Municipal Bond Department.
She joined the Franklin Templeton Investments in 1986.
JAMES CONN, VICE PRESIDENT OF ADVISERS
Mr. Conn has been an analyst or portfolio manager of the Alabama and Maryland
Funds since December 1999. He joined Franklin Templeton Investments in 1996.
Previously, he was a portfolio manager with California Investment Trust.
CARRIE HIGGINS, VICE PRESIDENT OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the Missouri Fund
since 1992. She joined the Franklin Templeton Investments 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 Investments
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
Investments in 1994.
CHRISTOPHER SPERRY, PORTFOLIO MANAGER OF ADVISERS
Mr. Sperry has been an analyst or portfolio manager of the Florida Fund since
February 2000. He joined the Franklin Templeton Investments in 1996.
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 Investments in 1989.
STELLA S. WONG, VICE PRESIDENT OF ADVISERS
Ms. Wong has been an analyst or portfolio manager of the Florida, Maryland,
Missouri, North Carolina and Virginia Funds since their inception. She joined
the Franklin Templeton Investments in 1986.
Each Fund pays Advisors a fee for managing the Fund's assets. For the fiscal
year ended February 29, 2000, each Fund paid to the manager for its services the
following management fees as a percentage of its average monthly assets:
MANAGEMENT FEES
-------------------------------------------------
Alabama Fund 0.55%
Florida Fund 0.46%
Georgia Fund 0.57%
Kentucky Fund 0.27% 1
Louisiana Fund 0.57%
Maryland Fund 0.54%
Missouri Fund 0.51%
North Carolina Fund 0.51%
Texas Fund 0.60%
Virginia Fund 0.51%
1. Management fees, before any advance waiver, were 0.63%. Under an agreement by
the manager to limit its fees, the Fund paid the fees as shown. The manager may
end this arrangement at any time upon notice to the Fund's Board of Trustees.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN 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.
Distributions that qualify as capital gain dividends for federal income tax
purposes 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 redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, 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.
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
The tables below present each Fund's financial performance for the past five
years. This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
ALABAMA FUND
CLASS A YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1 1999 1998 1997 1996 2
-------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.68 11.98 11.73 11.73 11.31
------------------------------------------------------
Net investment income .61 .62 .64 .65 .66
Net realized and unrealized
gains (losses) (1.06) (.25) .36 .01 .42
------------------------------------------------------
Total from investment
operations (.45) .37 1.00 .66 1.08
------------------------------------------------------
Distributions from net
investment income (.60) (.62) 4 (.65) (.66) (.66)
Distributions from net
realized gains (.01) (.05) (.10) - -
------------------------------------------------------
Total distributions (.61) (.67) (.75) (.66) (.66)
------------------------------------------------------
Net asset value, end of year 10.62 11.68 11.98 11.73 11.73
======================================================
Total return (%) 3 (3.92) 3.21 8.79 5.84 9.74
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 203,256 238,670 216,982 193,466 185,981
Ratios to average net assets:
(%)
Expenses .72 .71 .72 .71 .72
Net investment income 5.46 5.23 5.39 5.62 5.69
Portfolio turnover rate (%) 20.99 8.67 10.44 15.47 12.39
CLASS C
----------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.74 12.04 11.78 11.77 11.36
---------------------------------------------------
Net investment income .55 .56 .58 .59 .49
Net realized and unrealized
gains (losses) (1.06) (.25) .36 .01 .41
---------------------------------------------------
Total from investment
operations (.51) .31 .94 .60 .90
---------------------------------------------------
Distributions from net
investment income (.54) (.56)4 (.58) (.59) (.49)
Distributions from net
realized gains (.01) (.05) (.10) - -
---------------------------------------------------
Total distributions (.55) (.61) (.68) (.59) (.49)
---------------------------------------------------
Net asset value, end of year 10.68 11.74 12.04 11.78 11.77
===================================================
Total return (%) 3 (4.46) 2.62 8.23 5.28 8.01
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 14,056 14,895 9,469 5,683 1,662
Ratios to average net assets:
(%)
Expenses 1.27 1.27 1.29 1.28 1.29 5
Net investment income 4.91 4.67 4.80 5.05 5.09 5
Portfolio turnover rate (%) 20.99 8.67 10.44 15.47 12.39
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.006 and $.004 for Class A and C, respectively.
5. Annualized.
FLORIDA FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1, 2 1999 1998 1997 1996 3
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.91 11.87 11.59 11.69 11.35
-------------------------------------------------------
Net investment income .61 .62 .64 .67 .69
Net realized and unrealized
gains (losses) (1.02) .05 .30 (.08) .34
-------------------------------------------------------
Total from investment
operations (.41) .67 .94 .59 1.03
-------------------------------------------------------
Distributions from net
investment income (.61) (.62) 6 (.65) (.69) (.69)
Distributions from net
realized gains - 8 (.01) (.01) - -
-------------------------------------------------------
Total distributions (.61) (.63) (.66) (.69) (.69)
-------------------------------------------------------
Net asset value, end of year 10.89 11.91 11.87 11.59 11.69
=======================================================
Total return (%) 4 (3.54) 5.75 8.37 5.20 9.28
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1 million) 1,510 1,786 1,650 1,458 1,354
Ratios to average net assets:
(%)
Expenses .62 .61 .61 .60 .60
Net investment income 5.37 5.19 5.45 5.78 5.93
Portfolio turnover rate (%) 26.39 7.66 5.60 12.00 11.78
CLASS B
--------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.83
period
-------------
Net investment income .05
Net realized and unrealized .07
gains (losses)
-------------
Total from investment .12
operations
-------------
Distributions from net (.05)
investment income
Distributions from net -
realized gains
-------------
Total distributions -
-------------
Net asset value, end of period 10.90
=============
Total return (%) 4 1.07
RATIOS/SUPPLEMENTAL DATA Net assets, end of period ($ 304 x 1,000) Ratios to
average net assets:
(%)
Expenses 1.17 5
Net investment income 5.32 5
Portfolio turnover rate (%) 26.39
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.01 11.96 11.67 11.76 11.37
-------------------------------------------------------
Net investment income .55 .55 .60 .60 .52
Net realized and unrealized
gains (losses) (1.04) .06 .29 (.07) .38
-------------------------------------------------------
Total from investment
operations (.49) .61 .89 .53 .90
-------------------------------------------------------
Distributions from net
investment income (.54) (.55) 7 (.59) (.62) (.51)
Distributions from net
realized gains - 8 (.01) (.01) - -
-------------------------------------------------------
Total distributions (.54) (.56) (.60) (.62) (.51)
-------------------------------------------------------
Net asset value, end of year 10.98 12.01 11.96 11.67 11.76
=======================================================
Total return (%) 4 (4.14) 5.21 7.80 4.65 8.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 72,135 82,596 56,027 23,556 7,644
1,000)
Ratios to average net assets:
(%)
Expenses 1.17 1.17 1.17 1.17 1.18 5
Net investment income 4.83 4.63 4.88 5.17 5.33 5
Portfolio turnover rate (%) 26.39 7.66 5.60 12.00 11.78
1. Based on average shares outstanding.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for
Class C.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
6. Includes distributions in excess of net investment income in
the amount of $.0005.
7. Includes distributions in excess of net investment income in the
amount of $.0004.
8. The Fund made a capital gain distribution of $.0009.
GEORGIA FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.07 12.12 11.86 11.88 11.54
-------------------------------------------------------
Net investment income .59 .61 .63 .65 .66
Net realized and unrealized
gains (losses) (1.03) .01 .27 (.02) .34
-------------------------------------------------------
Total from investment
operations (.44) .62 .90 .63 1.00
-------------------------------------------------------
Distributions from net (.60) 4 (.61) 6 (.64) 7 (.65) (.66)
investment income
Distributions from net
realized gains - 5 (.06) - - -
-------------------------------------------------------
Total distributions (.60) (.67) (.64) (.65) (.66)
-------------------------------------------------------
Net asset value, end of year 11.03 12.07 12.12 11.86 11.88
=======================================================
Total return (%) 3 (3.71) 5.22 7.75 5.47 8.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 151,670 164,669 149,642 139,903 130,380
1,000)
Ratios to average net assets:
(%)
Expenses .75 .76 .76 .75 .77
Net investment income 5.14 5.00 5.28 5.49 5.58
Portfolio turnover rate (%) 46.90 12.84 14.77 17.47 10.98
CLASS C
----------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.15 12.19 11.92 11.92 11.57
---------------------------------------------------
Net investment income .53 .54 .57 .58 .50
Net realized and unrealized
gains (losses) (1.05) .02 .27 (.01) .34
---------------------------------------------------
Total from investment
operations (.52) .56 .84 .57 .84
---------------------------------------------------
Distributions from net
investment income (.53) 4 (.54) 6 (.57) (.57) (.49)
Distributions from net
realized gains - 5 (.06) - - -
---------------------------------------------------
Total distributions (.53) (.60) (.57) (.57) (.49)
---------------------------------------------------
Net asset value, end of year 11.10 12.15 12.19 11.92 11.92
===================================================
Total return (%) 3 (4.32) 4.70 7.19 4.97 7.40
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 14,811 17,277 9,107 4,484 1,335
Ratios to average net assets:
(%)
Expenses 1.30 1.31 1.32 1.32 1.34 8
Net investment income 4.58 4.45 4.72 4.87 5.04 8
Portfolio turnover rate (%) 46.90 12.84 14.77 17.47 10.98
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.007 and $.006 for Class A and C, respectively.
5. The fund made a capital gain distribution of $.002.
6. Includes distributions in excess of net investment income in the amount of
$.004 and $.003 for Class A and C, respectively.
7. Includes distributions in excess of net investment income in the amount of
$.001.
8. Annualized.
KENTUCKY FUND YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996
---------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.47 11.45 11.05 11.04 10.54
--------------------------------------------------------
Net investment income .58 .59 .61 .61 .62
Net realized and unrealized
gains (losses) (1.04) .03 .40 .01 .50
--------------------------------------------------------
Total from investment
operations (.46) .62 1.01 .62 1.12
--------------------------------------------------------
Distributions from net
investment income (.59) 3 (.60) 4 (.61) (.61) (.62)
--------------------------------------------------------
Net asset value, end of year 10.42 11.47 11.45 11.05 11.04
========================================================
Total return (%) 2 (4.13) 5.51 9.38 5.86 10.73
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 63,964 64,516 54,211 44,289 38,991
1,000)
Ratios to average net assets:
(%)
Expenses .45 .42 .35 .34 .33
Expenses excluding waiver
and payments by affiliate .81 .81 .81 .81 .82
Net investment income 5.31 5.12 5.40 5.63 5.65
Portfolio turnover rate (%) 16.31 10.49 26.61 24.81 31.89
1. Based on average shares outstanding.
2. Total return does not include sales charges.
3. Includes distribution in excess of net investment income in the amount of
$.005.
4. Includes distributions in excess of net investment income in the
amount of $.004.
LOUISIANA FUND
CLASS A YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.59 11.61 11.32 11.32 11.03
-------------------------------------------------------
Net investment income .58 .60 .63 .65 .66
Net realized and unrealized
gains (losses) (1.03) (.01) .30 - .28
-------------------------------------------------------
Total from investment
operations (.45) .59 .93 .65 .94
-------------------------------------------------------
Distributions from net
investment income (.59) 4 (.61) 5 (.64) (.65) (.65)
-------------------------------------------------------
Net asset value, end of year 10.55 11.59 11.61 11.32 11.32
=======================================================
Total return (%) 3 (3.93) 5.23 8.46 5.94 8.75
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 144,299 158,099 134,922 112,981 107,461
Ratios to average net assets:
(%)
Expenses .74 .75 .76 .76 .78
Net investment income 5.29 5.14 5.50 5.76 5.89
Portfolio turnover rate (%) 27.31 14.99 15.26 13.68 5.23
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.66 11.68 11.37 11.37 11.01
-------------------------------------------------------
Net investment income .53 .54 .57 .58 .49
Net realized and unrealized
gains (losses) (1.04) (.01) .32 - .35
-------------------------------------------------------
Total from investment
operations (.51) .53 .89 .58 .84
-------------------------------------------------------
Distributions from net
investment income (.53) 4 (.55) 5 (.58) (.58) (.48)
-------------------------------------------------------
Net asset value, end of year 10.62 11.66 11.68 11.37 11.37
=======================================================
Total return (%) 3 (4.45) 4.61 8.02 5.27 7.76
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 10,730 9,982 4,469 3,004 1,438
Ratios to average net assets:
(%)
Expenses 1.29 1.31 1.32 1.33 1.35 6
Net investment income 4.74 4.58 4.95 5.29 5.27 6
Portfolio turnover rate (%) 27.31 14.99 15.26 13.68 5.23
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.009 and $.008 for Class A and C, respectively.
5. Includes distributions in excess of net investment income in the amount of
$.0006 and $.0004 for Class A and C, respectively.
6. Annualized.
MARYLAND FUND
CLASS A YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
---------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.66 11.64 11.33 11.38 10.92
--------------------------------------------------------
Net investment income .56 .58 .59 .61 .62
Net realized and unrealized
gains (losses) (1.00) .06 .32 (.03) .47
--------------------------------------------------------
Total from investment
operations (.44) .64 .91 .58 1.09
--------------------------------------------------------
Distributions from net
investment income (.56) (.58) 4 (.60) 5 (.63) (.63)
Distributions from net
realized gains (.03) (.04) - - -
--------------------------------------------------------
Total distributions (.59) (.62) (.60) (.63) (.63)
--------------------------------------------------------
Net asset value, end of year 10.63 11.66 11.64 11.33 11.38
========================================================
Total return (%) 3 (3.86) 5.64 8.27 5.24 10.18
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 221,176 253,014 213,005 185,234 175,078
Ratios to average net assets:
(%)
Expenses .72 .74 .74 .73 .74
Net investment income 5.07 4.91 5.20 5.42 5.56
Portfolio turnover rate (%) 11.78 6.02 3.19 12.71 8.11
CLASS C
---------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.75 11.72 11.40 11.44 10.93
--------------------------------------------------------
Net investment income .51 .51 .54 .55 .47
Net realized and unrealized
gains (losses) (1.01) .07 .31 (.03) .51
--------------------------------------------------------
Total from investment
operations (.50) .58 .85 .52 .98
--------------------------------------------------------
Distributions from net
investment income (.50) (.51) 4 (.53) (.56) (.47)
Distributions from net
realized gains (.03) (.04) - - -
--------------------------------------------------------
Total distributions (.53) (.55) (.53) (.56) (.47)
--------------------------------------------------------
Net asset value, end of year 10.72 11.75 11.72 11.40 11.44
========================================================
Total return (%) 3 (4.37) 5.11 7.70 4.68 9.06
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 17,298 16,826 10,515 5,084 913
1,000)
Ratios to average net assets:
(%)
Expenses 1.27 1.29 1.30 1.27 1.31 6
Net investment income 4.53 4.35 4.63 4.78 4.95 6
Portfolio turnover rate (%) 11.78 6.02 3.19 12.71 8.11
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.004 and $.003 for Class A and C, respectively.
5. Includes distributions in excess of net investment income in the amount of
$.005.
6. Annualized.
MISSOURI FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.19 12.23 11.83 11.94 11.44
-------------------------------------------------------
Net investment income .60 .61 .64 .65 .65
Net realized and unrealized
gains (losses) (1.15) - .44 (.07) .49
-------------------------------------------------------
Total from investment
operations (.55) .61 1.08 .58 1.14
-------------------------------------------------------
Distributions from net
investment income (.61) (.62) (.64) (.65) (.64)
Distributions from net
realized gains (.01) (.03) (.04) (.04) -
-------------------------------------------------------
Total distributions (.62) (.65) (.68) (.69) (.64)
-------------------------------------------------------
Net asset value, end of year 11.02 12.19 12.23 11.83 11.94
=======================================================
Total return (%) 3 (4.62) 5.12 9.43 5.06 10.23
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 346,649 386,948 308,045 269,564 247,522
Ratios to average net assets:
(%)
Expenses .69 .70 .71 .70 .71
Net investment income 5.16 4.99 5.32 5.56 5.58
Portfolio turnover rate (%) 18.43 15.21 14.30 21.81 18.27
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.24 12.27 11.85 11.97 11.47
-------------------------------------------------------
Net investment income .53 .54 .58 .57 .48
Net realized and unrealized
gains (losses) (1.16) .01 .45 (.07) .50
-------------------------------------------------------
Total from investment
operations (.63) .55 1.03 .50 .98
-------------------------------------------------------
Distributions from net
investment income (.54) (.55) (.57) (.58) (.48)
Distributions from net
realized gains (.01) (.03) (.04) (.04) -
-------------------------------------------------------
Total distributions (.55) (.58) (.61) (.62) (.48)
-------------------------------------------------------
Net asset value, end of year 11.06 12.24 12.27 11.85 11.97
=======================================================
Total return (%) 3 (5.21) 4.58 8.96 4.32 8.66
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 23,537 20,396 10,045 4,295 1,325
Ratios to average net assets:
(%)
Expenses 1.24 1.25 1.27 1.27 1.27 4
Net investment income 4.62 4.44 4.75 4.92 4.94 4
Portfolio turnover rate (%) 18.43 15.21 14.30 21.81 18.27
1. Base on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
NORTH CAROLINA FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.16 `12.11 11.73 11.75 11.37
-------------------------------------------------------
Net investment income .60 .60 .62 .64 .64
Net realized and unrealized
gains (losses) (1.12) .06 .38 (.03) .39
-------------------------------------------------------
Total from investment
operations (.52) .66 1.00 .61 1.03
-------------------------------------------------------
Distributions from net
investment income (.60) (.61) (.62) (.63) (.65) 4
-------------------------------------------------------
Net asset value, end of year 11.04 12.16 12.11 11.73 11.75
=======================================================
Total return (%) 3 (4.37) 5.54 8.78 5.38 9.28
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 315,101 349,419 297,406 260,979 247,031
Ratios to average net assets:
(%)
Expenses .68 .70 .70 .70 .71
Net investment income 5.18 4.95 5.24 5.47 5.52
Portfolio turnover rate (%) 21.07 5.44 9.95 9.98 25.19
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 12.24 12.18 11.79 11.80 11.41
-------------------------------------------------------
Net investment income .54 .54 .56 .57 .49
Net realized and unrealized
gains (losses) (1.13) .06 .39 (.02) .38
-------------------------------------------------------
Total from investment
operations (.59) .60 .95 .55 .87
-------------------------------------------------------
Distributions from net
investment income (.53) (.54) (.56) (.56) (.48)
-------------------------------------------------------
Net asset value, end of year 11.12 12.24 12.18 11.79 11.80
=======================================================
Total return (%) 3 (4.88) 5.02 8.22 4.83 7.77
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 38,577 38,171 20,043 9,607 2,430
Ratios to average net assets:
(%)
Expenses 1.23 1.25 1.26 1.26 1.28 5
Net investment income 4.63 4.40 4.69 4.85 4.90 5
Portfolio turnover rate (%) 21.07 5.44 9.95 9.98 25.19
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.001.
5. Annualized.
TEXAS FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.42 11.68 11.37 11.58 11.25
-------------------------------------------------------
Net investment income .58 .60 .62 .66 .67
Net realized and unrealized
gains (losses) (1.16) (.05) .36 - .34
-------------------------------------------------------
Total from investment
operations (.58) .55 .98 .66 1.01
-------------------------------------------------------
Distributions from net
investment income (.58) 4 (.60) 5 (.63) (.67) (.68)
In excess of net investment
income - - (.01) - -
Distributions from net
realized gains (.04) (.21) (.03) (.20) -
-------------------------------------------------------
Total distributions (.62) (.81) (.67) (.87) (.68)
-------------------------------------------------------
Net asset value, end of year 10.22 11.42 11.68 11.37 11.58
=======================================================
Total return (%) 3 (5.21) 4.86 8.91 5.91 9.15
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 104,433 127,739 130,578 126,612 129,702
Ratios to average net assets:
(%)
Expenses .78 .77 .76 .75 .76
Net investment income 5.35 5.17 5.44 5.70 5.86
Portfolio turnover rate (%) 20.93 25.26 34.52 35.57 18.38
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.57 11.81 11.49 11.68 11.27
-------------------------------------------------------
Net investment income .53 .53 .58 .60 .51
Net realized and unrealized
gains (losses) (1.18) (.03) .35 .02 .40
-------------------------------------------------------
Total from investment
operations (.65) .50 .93 .62 .91
-------------------------------------------------------
Distributions from net
investment income (.52) 4 (.53) 5 (.58) 6 (.61) (.50)
Distributions from net
realized gains (.04) (.21) (.03) (.20) -
-------------------------------------------------------
Total distributions (.56) (.74) (.61) (.81) (.50)
-------------------------------------------------------
Net asset value, end of year 10.36 11.57 11.81 11.49 11.68
=======================================================
Total return (%) 3 (5.77) 4.40 8.31 5.48 8.23
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 4,650 5,229 2,076 740 79
Ratios to average net assets:
(%)
Expenses 1.34 1.33 1.33 1.32 1.33 7
Net investment income 4.79 4.61 4.79 5.03 5.23 7
Portfolio turnover rate (%) 20.93 25.26 34.52 35.57 18.38
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.002.
5. Includes distributions in excess of net investment income in the amount of
$.0005 and $.0003 for Class A and C, respectively.
6. Includes distributions in excess of net investment income in the amount of
$.001.
7. Annualized.
VIRGINIA FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.88 11.88 11.65 11.72 11.33
-------------------------------------------------------
Net investment income .59 .60 .62 .65 .66
Net realized and unrealized
gains (losses) (1.09) .03 .35 (.07) .38
-------------------------------------------------------
Total from investment
operations (.50) .63 .97 .58 1.04
-------------------------------------------------------
Distributions from net
investment income (.59) 4 (.60) 5 (.64) (.64) (.65)
Distributions from net
realized gains - (.03) (.10) (.01) -
-------------------------------------------------------
Total distributions (.59) (.63) (.74) (.65) (.65)
-------------------------------------------------------
Net asset value, end of year 10.79 11.88 11.88 11.65 11.72
=======================================================
Total return (%) 3 (4.31) 5.40 8.53 5.15 9.41
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 327,235 379,670 332,199 287,172 271,396
Ratios to average net assets:
(%)
Expenses .68 .68 .69 .69 .69
Net investment income 5.19 4.98 5.29 5.56 5.66
Portfolio turnover rate (%) 22.53 8.90 12.90 19.25 12.72
CLASS C
--------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of
year 11.95 11.95 11.71 11.77 11.35
-------------------------------------------------------
Net investment income .53 .53 .57 .58 .49
Net realized and unrealized
gains (losses) (1.09) .03 .34 (.05) .41
-------------------------------------------------------
Total from investment
operations (.56) .56 .91 .53 .90
-------------------------------------------------------
Distributions from net
investment income (.53) 4 (.53) 5 (.57) (.58) (.48)
Distributions from net
realized gains - (.03) (.10) (.01) -
-------------------------------------------------------
Total distributions (.53) (.56) (.67) (.59) (.48)
-------------------------------------------------------
Net asset value, end of year 10.86 11.95 11.95 11.71 11.77
=======================================================
Total return (%) 3 (4.82) 4.78 7.97 4.61 8.07
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 21,454 22,796 13,186 6,674 2,050
Ratios to average net assets:
(%)
Expenses 1.23 1.24 1.25 1.25 1.26 6
Net investment income 4.64 4.42 4.72 4.94 5.06 6
Portfolio turnover rate (%) 22.53 8.90 12.90 19.25 12.72
</TABLE>
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Includes distributions in excess of net investment income in the amount of
$.0004 and $.0003 for Class A and C, respectively.
5. Includes distributions in excess of net investment income in the amount of
$.0005 and $.0004 for Class A and C, respectively.
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 B (FLORIDA FUND CLASS C (ALL FUNDS
ONLY) EXCEPT KENTUCKY)
-------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 4.25% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
THE FLORIDA FUND BEGAN OFFERING CLASS B SHARES ON FEBRUARY 1, 2000.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE 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 39), 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 38).
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 B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
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 38). 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 each 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.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE 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 each 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 44
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]
FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[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. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class 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
---------------------------------------------------------------------------
Automatic investment plans $50 $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
---------------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE
FOR SALE IN YOUR STATE OR JURISDICTION.
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
"Investor Services" on page 43).For example, if you would like to link one of
your bank accounts to your Fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please
complete the bank information section of the application. We will keep your
bank information on file for future purchases and redemptions.
BUYING SHARES
-------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
-------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
-------------------------------------------------------------------------------
[Insert graphic of If you have another Franklin Before requesting a
phone] Templeton account with your telephone purchase, please
bank account information on make sure we have your bank
BY PHONE file, you may open a new account information on file.
account by phone. The If we do not have this
(Up to $100,000 per accounts must be identically information, you will need
day) registered. to send written instructions
with your bank's name and
1-800/632-2301 To make a same day address, a voided check or
investment, please call us savings account deposit
by 1:00 p.m. Pacific time or slip, and a signature
the close of the New York guarantee if the ownership
Stock Exchange, whichever is of the bank and Fund
earlier. accounts is different.
To make a same day
investment, please call us
by 1:00 p.m. Pacific time or
the close of the New York
Stock Exchange, whichever is
earlier.
-------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the Fund. the Fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. 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 control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. Pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
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 Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page 44 for (Please see page 44 for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
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
the Fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application and mail it to Investor Services. If you are opening
a new account, please include the minimum initial investment of $50 with your
application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a Fund automatically 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 buy,
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 Fund 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. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
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 purchase, 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.
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.
Because excessive trading can hurt Fund performance, operations and
shareholders, each Fund, effective September 15, 2000, reserves the right to
revise or terminate the exchange privilege, limit the amount or number of
exchanges, reject any exchange, or restrict or refuse purchases if (i) the Fund
or its manager believes the Fund would be harmed or unable to invest
effectively, or (ii) the Fund receives or anticipates simultaneous orders that
may significantly affect the Fund (please see "Market Timers" on page 43).
*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 a certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
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 share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL 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 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 You can call or write to have redemption
three lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
phone.
Before requesting to have redemption proceeds
BY ELECTRONIC FUNDS sent to a bank account, please make sure we
TRANSFER (ACH) 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, a voided check or savings account deposit
slip, and a signature guarantee if the ownership of
the bank and Fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
--------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows 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 quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). 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 copies of all notifications and 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 restrict or 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 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, wire or electronic funds transfer 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 B 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
A dealer commission of up to 1% may be paid on Class C NAV purchases. 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 also can 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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.franklintempleton.com
You also can obtain information about each Fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-4149 TF2 P 07/00
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 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, 2000
[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
18 Fees and Expenses
24 Management
26 Distributions and Taxes
28 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT
SALES CHARGES, ACCOUNT
TRANSACTIONS AND
SERVICES
[End callout]
41 Choosing a Share Class
46 Buying Shares
49 Investor Services
52 Selling Shares
54 Account Policies
57 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 investment
management and the 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
investment management and the 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, if
any, for resident shareholders of that Fund's state as is consistent with
prudent investment management and the preservation of shareholders' capital.
MAIN INVESTMENT STRATEGIES Under normal market conditions, each Fund invests
predominately in municipal securities whose interest is free from federal income
taxes, including the federal alternative minimum tax. In addition, each state
Fund invests predominately in municipal securities that pay interest free from
the personal income taxes, if any, of that 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, including interest that may be subject to the federal
alternative minimum tax.
[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. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (the "principal") be repaid at maturity.
[End callout]
Each Fund, except the High Yield Fund, only buys municipal 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 category, including defaulted securities, although it
currently invests primarily in securities rated BBB/Baa or below (or comparable
unrated securities).
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.
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. When selecting securities for the High Yield
Fund's portfolio, 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.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, a
Fund may be unable to achieve its investment goal.
[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 An issuer of municipal securities may 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. 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. To the extent that 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. A Fund might also be adversely impacted by the inability of an
insurer to meet its insurance 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 a
Fund's distributions, its yield, and the value of your investment in that 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 rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may 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, a 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. A call of some or all of these securities may
lower that 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 rise.
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 and Federal Intermediate 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 predominately 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 predominately 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 up to 35% of its total 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.
More detailed information about the Funds, their policies and risks and about
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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
5.83%
Worst
Quarter:
Q1 '94
-4.32%
[End callout]
5.80% 12.24% 10.02% 11.18% -4.03% 14.59% 4.21% 8.23% 5.44% -3.83%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Arizona Fund - Class A2 -7.95% 4.63% 5.75%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Arizona Fund - Class C2 -6.23% 3.92%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.72% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
6.62%
Worst
Quarter:
Q1 '94
-5.02%
[End callout]
5.78% 12.35% 10.00% 12.74% -5.43% 16.07% 4.76% 8.82% 5.73% -4.43%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Colorado Fund - Class A2 -8.52% 5.07% 5.96%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Colorado Fund - Class C2 -6.77% 4.18%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.99% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
5.54%
Worst
Quarter:
Q1 '94
-4.73%
[End callout]
4.93% 10.77% 8.33% 12.32% -5.40% 14.32% 4.48% 8.50% 5.96% -4.82%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Connecticut Fund - Class A2 -8.86% 4.60% 5.29%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Connecticut Fund - Class C2 -7.15% 3.84%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.23% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
5.19%
Worst
Quarter:
Q1 '94
-3.76%
[End callout]
12.68% -2.71% 14.42% 6.68% 5.27% 5.80% -1.84%
93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
--------------------------------------------------------------------------------
Federal Intermediate Fund2 -4.05% 5.47% 5.40%
Lehman Brothers 10-Year Municipal Bond Index3 -1.25% 7.12% 6.19%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 1.57% 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 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.
HIGH YIELD FUND - CLASS A ANNUAL TOTAL RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
6.38%
Worst
Quarter:
Q1 '94
-3.02%
[End callout]
5.11% 12.40% 9.25% 13.27% -2.59% 16.29% 6.16% 10.60% 4.81% -3.13%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
High Yield Fund - Class A2 -7.24% 5.83% 6.57%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (1/01/99)
--------------------------------------------------------------------------------
High Yield Fund - Class B2 -6.99% -6.99%
Lehman Brothers Municipal Bond Index3 -2.06% -2.06%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
High Yield Fund - Class C2 -5.55% 5.01%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.04% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
6.44%
Worst
Quarter:
Q1 '94
-4.79%
[End callout]
6.56% 12.46% 9.19% 10.97% -5.21% 15.58% 4.04% 8.34% 6.11% -3.36%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
New Jersey Fund - Class A2 -7.44% 5.05% 5.82%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
New Jersey Fund - Class C2 -5.74% 4.23%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.98% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
6.54%
Worst
Quarter:
Q1 '94
-4.55%
[End callout]
5.55% 12.63% 8.66% 10.91% -4.93% 15.08% 4.32% 8.24% 5.44% -3.87%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Oregon Fund - Class A2 -7.98% 4.74% 5.56%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Oregon Fund - Class C2 -6.16% 3.93%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.29% 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 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 RETURNS1
[Begin callout]
Best
Quarter:
Q1 '95
5.81%
Worst
Quarter:
Q1 '94
-3.64%
[End callout]
3.87% 13.48% 9.83% 11.66% -3.29% 14.34% 4.50% 8.94% 5.48% -4.08%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Pennsylvania Fund - Class A2 -8.18% 4.76% 5.84%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Pennsylvania Fund - Class C2 -6.48% 4.03%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.93% 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 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 RETURNS1
[End callout]
Best
Quarter:
Q1 '95
5.95%
Worst
Quarter:
Q1 '94
-4.27%
[End callout]
5.38% 12.27% 9.12% 10.99% -4.28% 14.49% 5.08% 8.75% 5.74% -2.34%
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Puerto Rico Fund - Class A2 -6.51% 5.29% 5.90%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
SINCE
INCEPTION
1 YEAR (5/1/95)
--------------------------------------------------------------------------------
Puerto Rico Fund - Class C2 -4.77% 4.45%
Lehman Brothers Municipal Bond Index3 -2.06% 5.84%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of March 31, 2000, the Fund's year-to-date return was 2.30% 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 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)
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD
CLASS A FUND FUND FUND FUND FUND
-----------------------------------------------------------------------------
Maximum sales charge 4.25% 4.25% 4.25% 2.25% 4.25%
(load) as a
percentage of
offering price
Load imposed on 4.25% 4.25% 4.25% 2.25% 4.25%
purchases
Maximum deferred None None None None None
sales charge (load)1
Exchange fee None None None None None
CLASS B2
-----------------------------------------------------------------------------
Maximum sales charge 4.00% - - - 4.00%
(load) as
a percentage of
offering price
Load imposed on None - - - None
purchases
Maximum deferred 4.00% - - - 4.00%
sales charge (load)3
Exchange fee None - - - None
CLASS C
-----------------------------------------------------------------------------
Maximum sales charge 1.99% 1.99% 1.99% - 1.99%
(load) as
a percentage of
offering price
Load imposed on 1.00% 1.00% 1.00% - 1.00%
purchases
Maximum deferred 0.99% 0.99% 0.99% - 0.99%
sales charge (load)4
Exchange fee None None None - None
NEW JERSEY OREGON PENNSYLVANIA PUERTO
CLASS A FUND FUND FUND RICO FUND
-----------------------------------------------------------------------------
Maximum sales charge 4.25% 4.25% 4.25% 4.25%
(load) as
a percentage of
offering price
Load imposed on purchases 4.25% 4.25% 4.25% 4.25%
Maximum deferred sales None None None None
charge (load)1
Exchange Fee None None None None
CLASS B2
-----------------------------------------------------------------------------
Maximum sales charge 4.00% - 4.00% -
(load) as a percentage
of offering price
Load imposed on purchases None - None -
Maximum deferred sales
charge (load)3 4.00% - 4.00% -
Exchange fee None - None -
CLASS C
-----------------------------------------------------------------------------
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
Please see "Choosing a Share Class" on page 41 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD
CLASS A FUND FUND FUND FUND FUND
--------------------------------------------------------------------------------
Management fees 0.48% 0.53% 0.54% 0.56% 0.45%
Distribution and
service (12b-1) fees 0.09% 0.10% 0.10% 0.10% 0.09%
Other expenses 0.05% 0.07% 0.07% 0.09% 0.07%
---------------------------------------------------------
Total annual Fund
operating expenses 0.62% 0.70% 0.71% 0.75%5 0.61%
---------------------------------------------------------
CLASS B2
--------------------------------------------------------------------------------
Management fees 0.48% - - - 0.45%
Distribution and
service (12b-1) fees 0.65% - - - 0.65%
Other expenses 0.05% - - - 0.07%
---------------------------------------------------------
Total annual Fund
operating expenses 1.18% - - - 1.17%
---------------------------------------------------------
CLASS C
--------------------------------------------------------------------------------
Management fees 0.48% 0.53% 0.54% - 0.45%
Distribution and
service (12b-1) fees 0.65% 0.65% 0.65% - 0.65%
Other expenses 0.05% 0.07% 0.07% - 0.07%
---------------------------------------------------------
Total annual Fund
operating expenses 1.18% 1.25% 1.26% - 1.17%
---------------------------------------------------------
NEW JERSEY OREGON PENNSYLVANIA PUERTO
CLASS A FUND FUND FUND RICO FUND
--------------------------------------------------------------------------------
Management fees 0.48% 0.50% 0.48% 0.56%
Distribution and service
(12b-1) fees 0.10% 0.10% 0.10% 0.09%
Other expenses 0.07% 0.06% 0.08% 0.09%
------------------------------------------------
Total annual Fund operating
expenses 0.65% 0.66% 0.66% 0.74%
------------------------------------------------
CLASS B2
--------------------------------------------------------------------------------
Management fees 0.48% - 0.48% -
Distribution and service
(12b-1) fees 0.65% - 0.65% -
Other expenses 0.07% - 0.08% -
------------------------------------------------
Total annual Fund operating
expenses 1.20% - 1.21% -
------------------------------------------------
CLASS C
--------------------------------------------------------------------------------
Management fees 0.48% 0.50% 0.48% 0.56%
Distribution and service
(12b-1) fees 0.65% 0.65% 0.65% 0.65%
Other expenses 0.07% 0.06% 0.08% 0.09%
------------------------------------------------
Total annual Fund operating
expenses 1.20% 1.21% 1.21% 1.30%
------------------------------------------------
1. Except for investments of $1 million or more (see page 42)
2. The Arizona, New Jersey and Pennsylvania Funds began offering Class B shares
on February 1, 2000. Total annual Fund operating expenses are annualized.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended February 29, 2000, 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 0.54% and total annual Fund operating expenses were 0.73%. The
administrator may end this arrangement at any time upon notice to the Fund's
Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in a Fund with the cost
of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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:
FEDERAL HIGH
ARIZONA COLORADO CONNECTICUT INTERMEDIATE YIELD
FUND FUND FUND FUND FUND
------------------------------------------------------------------------------
Assuming you sold your shares at
the end of the period
CLASS A
1 Year1 $486 $493 $494 $300 $485
3 Years $615 $639 $642 $459 $612
5 Years $756 $798 $803 $633 $751
10 Years $1,166 $1,259 $1,270 $1,134 $1,155
CLASS B
1 Year $520 - - - $519
3 Years $675 - - - $672
5 Years $849 - - - $844
10 Years2 $1,276 - - - $1,264
CLASS C
1 Year $318 $325 $326 - $317
3 Years $471 $493 $496 - $468
5 Years $743 $779 $785 - $737
10 Years $1,517 $1,596 $1,607 - $1,506
Assuming you stayed in the fund
CLASS B
1 Year $120 - - - $119
3 Years $375 - - - $372
5 Years $649 - - - $644
10 Years2 $1,276 - - - $1,264
CLASS C
1 Year $219 $226 $227 - $218
3 Years $471 $493 $496 - $468
5 Years $743 $779 $785 - $737
10 Years $1,517 $1,596 $1,607 - $1,506
NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
FUND FUND FUND FUND
-------------------------------------------------------------------------------
Assuming you sold your shares at
the end of the period
CLASS A
1 Year1 $489 $490 $490 $497
3 Years $624 $627 $627 $651
5 Years $772 $777 $777 $819
10 Years $1,201 $1,213 $1,213 $1,304
CLASS B
1 Year $522 - $523 -
3 Years $681 - $684 -
5 Years $860 - $865 -
10 Years $1,302 - $1,313 -
CLASS C
1 Year $320 $321 $321 $330
3 Years $477 $480 $480 $508
5 Years $753 $758 $758 $806
10 Years $1,540 $1,551 $1,551 $1,652
Assuming you stayed in the fund
CLASS B
1 Year $122 - $123 -
3 Years $381 - $384 -
5 Years $660 - $665 -
10 Years $1,302 - $1,313 -
CLASS C
1 Year $221 $222 $222 $231
3 Years $477 $480 $480 $508
5 Years $753 $758 $758 $806
10 Years $1,540 $1,551 $1,551 $1,652
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.
[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 $225 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:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Arizona, Colorado,
Connecticut, Federal Intermediate, New Jersey and Oregon Funds since their
inception and the High Yield, Pennsylvania and Puerto Rico Funds since 1987. She
is the co-Director of Franklin's Municipal Bond Department. She joined Franklin
Templeton Investments in 1986.
JAMES CONN, VICE PRESIDENT OF ADVISERS
Mr. Conn has been an analyst or portfolio manager of the Federal Intermediate
Fund since December 1999. He joined Franklin Templeton Investments in 1996.
Previously, he was a portfolio manager with California Investment Trust.
CARRIE HIGGINS, VICE PRESIDENT OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the Arizona, Colorado,
New Jersey, Oregon and Puerto Rico Funds since 1992. She joined Franklin
Templeton Investments in 1990.
JOHN HOPP, VICE PRESIDENT OF ADVISERS
Mr. Hopp has been an analyst or portfolio manager of the High Yield Fund since
1993. He joined Franklin Templeton Investments in 1991.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the Federal Intermediate
Fund since its inception and the Connecticut Fund since 1989. He joined Franklin
Templeton Investments in 1986.
CHRISTOPHER SPERRY, PORTFOLIO MANAGER OF ADVISERS
Mr. Sperry has been an analyst or portfolio manager of the Arizona and Oregon
Funds since February 2000. He joined Franklin Templeton Investments in 1996.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Arizona, Oregon and
Pennsylvania Funds since 1991. He joined Franklin Templeton Investments in 1989.
STELLA S. WONG, VICE PRESIDENT OF ADVISERS
Ms. Wong has been an analyst or portfolio manager of the Colorado, Connecticut,
New Jersey and Pennsylvania Funds since their inception and the Puerto Rico Fund
since 1986. She joined Franklin Templeton Investments in 1986.
Each Fund pays Advisers a fee for managing the Fund's assets. For the fiscal
year ended February 29, 2000, the Funds paid to the manager the following
management fees for its services:
MANAGEMENT FEES
(AS A PERCENTAGE OF
AVERAGE MONTHLY
ASSETS)
-------------------------------------------------------------------
Arizona Fund 0.48%
Colorado Fund 0.53%
Connecticut Fund 0.54%
Federal Intermediate Fund 0.54%1
High Yield Fund 0.45%
New Jersey Fund 0.48%
Oregon Fund 0.50%
Pennsylvania Fund 0.48%
Puerto Rico Fund 0.56%
1. Management fees, before any advance waiver, were 0.56% for the Federal
Intermediate Fund. Under an agreement by the manager to waive or limit its fees,
the Federal Intermediate Fund paid the management fees shown. The manager may
end this arrangement at any time upon notice to the Fund's Board of Trustees.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN 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. Distributions that qualify as capital gain dividends for
federal income tax purposes 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.
BACKUP WITHHOLDING
[Begin callout]
By law, a Fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, 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.
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
<TABLE>
<CAPTION>
CLASS A YEAR ENDED FEBRUARY 29,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1,2 1999 1998 1997 1996 7
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.38 11.44 11.24 11.34 11.11
year
-------------------------------------------------
Net investment income .57 .59 .61 .62 .64
Net realized and unrealized
gains (losses) (1.02) (.01) .29 (.04) .36
-------------------------------------------------
Total from investment (.45) .58 .90 .58 1.00
operations
-------------------------------------------------
Distributions from net
investment income (.58)3 (.59)4 (.61) (.63) (.65)
In excess of net investment - - (.01) - -
income
Distributions from net
realized gains (.04) (.05) (.08) (.05) (.12)
-------------------------------------------------
Total distributions (.62) (.64) (.70) (.68) (.77)
-------------------------------------------------
Net asset value, end of year 10.31 11.38 11.44 11.24 11.34
-------------------------------------------------
Total return (%)5 (4.15) 5.17 8.23 5.33 9.24
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 756,274 861,020 810,250 752,335 750,797
1,000)
Ratios to average net assets:
(%)
Expenses .62 .63 .63 .62 .62
Net investment income 5.30 5.11 5.40 5.59 5.67
Portfolio turnover rate (%) 20.55 14.11 20.02 16.57 25.12
</TABLE>
CLASS B
------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.24
period ----------------
Net investment income .05
Net realized and unrealized
gains (losses) .07
----------------
Total from investment .12
operations
----------------
Distributions from net
investment income (.04)
Net asset value, end of period 10.32
----------------
Total return (%)5 1.21
RATIOS/SUPPLEMENTAL DATA Net assets, end of period ($ x 176 1,000) Ratios to
average net assets: (%)
Expenses 1.18 6
Net investment income 5.26 6
Portfolio turnover rate (%) 20.55
ARIZONA FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C YEAR ENDED FEBRUARY 29,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996 7
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.45 11.51 11.30 11.38 11.15
year
-------------------------------------------------
Net investment income .52 .52 .56 .57 .49
Net realized and unrealized
gains (losses) (1.03) (.01) .29 (.03) .34
-------------------------------------------------
Total from investment (.51) .51 .85 .54 .83
operations
-------------------------------------------------
Distributions from net
investment income (.52)3 (.52)3 (.56) (.57) (.48)
Distributions from net
realized gains (.04) (.05) (.08) (.05) (.12)
-------------------------------------------------
Total distributions (.56) (.57) (.64) (.62) (.60)
-------------------------------------------------
Net asset value, end of year 10.38 11.45 11.51 11.30 11.38
-------------------------------------------------
Total return (%)5 (4.65) 4.54 7.67 4.89 7.60
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 22,671 23,871 14,537 5,486 1,892
1,000)
Ratios to average net assets:
(%)
Expenses 1.18 1.19 1.19 1.19 1.20 6
Net investment income 4.75 4.55 4.82 5.01 5.05 6
Portfolio turnover rate (%) 20.55 14.11 20.02 16.57 25.12
</TABLE>
1. Based on average shares outstanding.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. Includes distributions in excess of net investment income in the amount of
$.001.
4. Includes distributions in excess of net investment income in the amount of
$.002.
5. Total return does not include sales charges, and is not annualized.
6. Annualized.
7. For the period May 1,1995 (effective date) to February 29, 1996.
COLORADO FUND
<TABLE>
<CAPTION>
CLASS A YEAR ENDED FEBRUARY 29,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1 1999 1998 1997 1996 2
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 12.05 12.11 11.80 11.84 11.38
year
-------------------------------------------------
Net investment income .59 .60 .63 .66 .67
Net realized and unrealized
gains (losses) (1.13) .02 .39 (.04) .45
-------------------------------------------------
Total from investment (.54) .62 1.02 .62 1.12
operations
-------------------------------------------------
Distributions from net
investment income (.60)3 (.60) (.64) (.66) (.66)
Distributions from net (.01) (.08) (.07) - -
realized gains
-------------------------------------------------
Total distributions (.61) (.68) (.71) (.66) (.66)
-------------------------------------------------
Net asset value, end of year 10.90 12.05 12.11 11.80 11.84
-------------------------------------------------
Total return (%)4 (4.57) 5.24 8.86 5.44 10.12
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 264,563 301,381 266,599 236,609 215,609
1,000)
Ratios to average net assets:
(%)
Expenses .70 .70 .71 .71 .71
Net investment income 5.18 4.93 5.28 5.59 5.73
Portfolio turnover rate (%) 29.30 12.60 22.97 14.13 17.58
</TABLE>
CLASS C
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 12.11 12.17 11.84 11.87 11.40
year ------------------------------------------------
Net investment income .53 .54 .57 .59 .50
Net realized and unrealized
gains (losses) (1.14) .02 .40 (.02) .46
------------------------------------------------
Total from investment (.61) .56 .97 .57 .96
operations
------------------------------------------------
Distributions from net
investment income (.53)5 (.54) (.57) (.60) (.49)
Distributions from net
realized gains (.01) (.08) (.07) - -
------------------------------------------------
Total distributions (.54) (.62) (.64) (.60) (.49)
------------------------------------------------
Net asset value, end of year 10.96 12.11 12.17 11.84 11.87
------------------------------------------------
Total return (%)4 (5.08) 4.63 8.39 4.93 8.57
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 20,564 21,899 10,855 5,654 1,656
1,000)
Ratios to average net assets:
(%)
Expenses 1.25 1.26 1.27 1.28 1.29 6
Net investment income 4.63 4.38 4.72 4.99 5.12 6
Portfolio turnover rate (%) 29.30 12.60 22.97 14.13 17.58
1. Based on average shares outstanding.
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
$.006.
4. Total return does not include sales charges, and is not annualized.
5. Includes distributions in excess of net investment income in the amount of
$.005.
6. Annualized.
CONNECTICUT FUND
CLASS A YEAR ENDED FEBRUARY 29,
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1 1999 1998 1997 1996 2
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.27 11.23 10.92 10.96 10.64
year ------------------------------------------------
Net investment income .56 .58 .60 .61 .62
Net realized and unrealized
gains (losses) (1.21) .04 .32 (.02) .32
-------------------------------------------------
Total from investment (.65) .62 .92 .59 .94
operations
-------------------------------------------------
Distributions from net
investment income (.56) (.58)3 (.60) (.63) (.62)
In excess of net investment - - (.01) - -
income
-------------------------------------------------
Total distributions (.56) (.58) (.61) (.63) (.62)
-------------------------------------------------
Net asset value, end of year 10.06 11.27 11.23 10.92 10.96
-------------------------------------------------
Total return (%)4 (5.90) 5.62 8.62 5.52 9.04
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 207,745 245,016 203,643 183,649 167,045
1,000)
Ratios to average net assets:
(%)
Expenses .71 .72 .73 .72 .73
Net investment income 5.26 5.08 5.41 5.62 5.70
Portfolio turnover rate (%) 30.61 5.87 18.54 14.53 3.88
</TABLE>
CLASS C
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.30 11.26 10.94 10.97 10.65
year
------------------------------------------------
Net investment income .50 .52 .55 .60 .47
Net realized and unrealized
gains (losses) (1.20) .03 .31 (.07) .31
------------------------------------------------
Total from investment (.70) .55 .86 .53 .78
operations
------------------------------------------------
Distributions from net
investment income (.50) (.51)3 (.54) (.56) (.46)
------------------------------------------------
Net asset value, end of year 10.10 11.30 11.26 10.94 10.97
------------------------------------------------
Total return (%)4 (6.32) 5.02 8.08 5.03 7.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 25,007 23,443 8,636 4,149 1,656
1,000)
Ratios to average net assets:
(%)
Expenses 1.26 1.28 1.29 1.29 1.30 5
Net investment income 4.73 4.53 4.85 5.01 5.12 5
Portfolio turnover rate (%) 30.61 5.87 18.54 14.53 3.88
1. Based on average shares outstanding.
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
$.002.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
FEDERAL INTERMEDIATE FUND
YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
20001 1999 1998 1997 1996
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.30 11.25 10.94 10.95 10.48
year
------------------------------------------------
Net investment income .51 .51 .53 .55 .55
Net realized and unrealized
gains (losses) (.78) .06 .33 (.01) .47
------------------------------------------------
Total from investment (.27) .57 .86 .54 1.02
operations
------------------------------------------------
Distributions from net
investment income (.51) (.52) (.55) (.55) (.55)
------------------------------------------------
Net asset value, end of year 10.52 11.30 11.25 10.94 10.95
------------------------------------------------
Total return (%)2 (2.43) 5.17 8.02 5.12 9.93
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 170,907 195,598 139,545 104,715 85,967
1,000)
Ratios to average net assets:
(%)
Expenses .73 .75 .75 .68 .65
Expenses excluding waiver
and payments by affiliate .75 .78 .82 .84 .85
Net investment income 4.72 4.53 4.83 5.16 5.12
Portfolio turnover rate (%) 31.27 16.57 23.32 22.54 3.35
1. Based on average shares outstanding.
2. Total return does not include sales charges.
HIGH YIELD FUND
CLASS A YEAR ENDED FEBRUARY 29,
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
20001 19992 1998 1997 19963
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.49 11.68 11.21 11.19 10.74
year
-------------------------------------------------
Net investment income .65 .66 .69 .71 .74
Net realized and unrealized
gains (losses) (1.08) (.18) .47 .04 .45
-------------------------------------------------
Total from investment (.43) .48 1.16 .75 1.19
operations
-------------------------------------------------
Distributions from net
investment income (.65)4 (.65) (.68) (.73)5 (.74)
In excess of net investment - - (.01) - -
Income
Distributions from net
realized gains -6 (.02) - - -
-------------------------------------------------
Total distributions (.65) (.67) (.69) (.73) (.74)
-------------------------------------------------
Net asset value, end of year 10.41 11.49 11.68 11.21 11.19
-------------------------------------------------
Total return (%)7 (3.81) 4.21 10.64 7.01 11.35
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1 thousands) 5,017 5,988 5,743 4,505 3,787
Ratios to average net assets:
(%)
Expenses .61 .62 .61 .62 .61
Net investment income 5.92 5.64 5.98 6.41 6.68
Portfolio turnover rate (%) 25.35 18.55 15.84 6.98 9.23
</TABLE>
CLASS B
----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.52 11.51
period
--------------------------------
Net investment income .59 .11
Net realized and unrealized
gains (losses) (1.07) -
--------------------------------
Total from investment (.48) .11
operations
--------------------------------
investment income (.59)4,6 (.10)
--------------------------------
Distribution from net realized -6 -
gains
Net asset value, end of period 10.45 11.52
--------------------------------
Total return (%)7 (4.27) .96
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($ x 1,000) 92,099 15,487
Ratios to average net assets:
(%)
Expenses 1.17 1.18 8
Net investment income 5.44 5.06 8
Portfolio turnover rate (%) 25.35 18.55
HIGH YIELD FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
20001 19992 1998 1997 19963
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.56 11.75 11.26 11.24 10.81
year
------------------------------------------------
Net investment income .59 .60 .63 .66 .56
Net realized and unrealized
gains (losses) (1.08) (.18) .48 .03 .42
------------------------------------------------
Total from investment (.49) .42 1.11 .69 .98
operations
------------------------------------------------
Distributions from net
investment income (.59)4 (.59) (.62) (.67)4 (.55)
Distributions from net
realized gains -6 (.02) - - -
------------------------------------------------
Total distributions (.59) (.61) (.62) (.67) (.55)
------------------------------------------------
Net asset value, end of year 10.48 11.56 11.75 11.26 11.24
------------------------------------------------
Total return (%)7 (4.41) 3.69 10.15 6.36 9.27
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 540,932 631,974 423,264 194,400 48,163
1,000)
Ratios to average net assets:
(%)
Expenses 1.17 1.18 1.18 1.18 1.18 8
Net investment income 5.35 5.07 5.38 5.78 6.07 8
Portfolio turnover rate (%) 25.35 18.55 15.84 6.98 9.23
1. Based on average shares outstanding.
2. For the period January 1, 1999 (effective date) to February 28, 1999 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
4. Includes distributions in excess of net investment income in the amount of
$.003.
5. Includes distributions in excess of net investment income in the amount of
$.008.
6. The Fund made a capital gain distribution of $.003.
7. Total return does not include sales charges, and is not annualized.
8. Annualized.
NEW JERSEY FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1,2 1999 1998 1997 1996 3
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.96 11.92 11.61 11.68 11.28
year ------------------------------------------------
Net investment income .60 .61 .63 .64 .65
Net realized and unrealized
gains (losses) (.96) .05 .32 (.06) .39
------------------------------------------------
Total from investment (.36) .66 .95 .58 1.04
operations ------------------------------------------------
Distributions from net
investment income (.61)4,5 (.62) (.64) (.65) (.64)
------------------------------------------------
Net asset value, end of year 10.99 11.96 11.92 11.61 11.68
------------------------------------------------
Total return (%)7 (3.08) 5.63 8.37 5.13 9.43
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 617,407 681,818 636,929 574,691 564,864
1,000)
Ratios to average net assets:
(%)
Expenses .65 .65 .66 .64 .65
Net investment income 5.23 5.06 5.34 5.58 5.65
Portfolio turnover rate (%) 21.21 5.43 12.77 8.87 12.04
CLASS B
------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.89
period
----------------
Net investment income .06
Net realized and unrealized
gains (losses) .10
----------------
Total from investment .16
operations
----------------
Distributions from net
investment income (.05)
----------------
Net asset value, end of period 11.00
----------------
Total return (%)7 1.44
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($ x 226 1,000) Ratios to
average net assets: (%)
Expenses 1.20 8
Net investment income 4.66 8
Portfolio turnover rate (%) 21.21
NEW JERSEY FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1,2 1999 1998 1997 1996 3
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 12.03 11.98 11.66 11.72 11.30
year ------------------------------------------------
Net investment income .54 .54 .56 .57 .49
Net realized and unrealized
gains (losses) (.98) .06 .33 (.05) .40
------------------------------------------------
Total from investment (.44) .60 .89 .52 .89
operations
------------------------------------------------
Distributions from net
investment income (.54)5,6 (.55) (.57) (.58) (.47)
------------------------------------------------
Net asset value, end of year 11.05 12.03 11.98 11.66 11.72
------------------------------------------------
Total return (%)7 (3.69) 5.09 7.84 4.57 8.02
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 46,403 48,715 28,139 13,095 4,542
1,000)
Ratios to average net assets:
(%)
Expenses 1.20 1.21 1.21 1.21 1.23 8
Net investment income 4.67 4.50 4.77 5.01 5.15 8
Portfolio turnover rate (%) 21.21 5.43 12.77 8.87 12.04
1. Based on average shares outstanding.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
4. Includes distributions in excess of net investment income in the amount of
$.006.
5. The Fund made a capital gain distribution of $.003.
6. Includes distributions in excess of net investment income in the amount of
$.005.
7. Total return does not include sales charges, and is not annualized.
8. Annualized.
OREGON FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.83 11.86 11.55 11.60 11.22
year ------------------------------------------------
Net investment income .58 .59 .62 .63 .63
Net realized and unrealized
gains (losses) (1.02) (.01) .31 (.05) .38
------------------------------------------------
Total from investment (.44) .58 .93 .58 1.01
operations ------------------------------------------------
Distributions from net
investment income (.58) (.61) (.62) (.63) (.63)
------------------------------------------------
Net asset value, end of year 10.81 11.83 11.86 11.55 11.60
------------------------------------------------
Total return (%)3 (3.76) 5.12 8.21 5.13 9.19
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 432,675 483,664 427,022 384,003 375,415
1,000)
Ratios to average net assets:
(%)
Expenses .66 .67 .67 .66 .66
Net investment income 5.16 5.00 5.33 5.52 5.51
Portfolio turnover rate (%) 24.58 10.65 12.18 4.47 6.52
CLASS C
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.90 11.92 11.61 11.65 11.23
year ------------------------------------------------
Net investment income .52 .53 .56 .56 .47
Net realized and unrealized
gains (losses) (1.02) - .31 (.04) .41
------------------------------------------------
Total from investment (.50) .53 .87 .52 .88
operations ------------------------------------------------
Distributions from net
investment income (.52) (.55) (.56) (.56) (.46)
------------------------------------------------
Net asset value, end of year 10.88 11.90 11.92 11.61 11.65
------------------------------------------------
Total return (%)3 (4.36) 4.59 7.66 4.59 7.99
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 34,071 32,962 15,946 7,100 2,044
1,000)
Ratios to average net assets:
(%)
Expenses 1.21 1.23 1.22 1.23 1.24 4
Net investment income 4.62 4.44 4.74 4.93 4.87 4
Portfolio turnover rate (%) 24.58 10.65 12.18 4.47 6.52
1. Based on average shares outstanding.
2. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
PENNSYLVANIA FUND
<TABLE>
<CAPTION>
CLASS A YEAR ENDED FEBRUARY 29,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2000 1,2 1999 1998 1997 1996 3
---------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.52 10.56 10.39 10.44 10.16
year -------------------------------------------------
Net investment income .53 .55 .58 .60 .62
Net realized and unrealized
gains (losses) (.97) (.02) .32 (.04) .29
-------------------------------------------------
Total from investment (.44) .53 .90 .56 .91
operations
-------------------------------------------------
Distributions from net
investment income (.53)4 (.55) (.58) (.61) (.63)
In excess of net investment - (.01) (.01) - -
income
Distributions from net
realized gains -6 (.01) (.14) - -
-------------------------------------------------
Total distributions (.53) (.57) (.73) (.61) (.63)
-------------------------------------------------
Net asset value, end of year 9.55 10.52 10.56 10.39 10.44
-------------------------------------------------
Total return (%)7 (4.24) 5.11 8.90 5.53 9.15
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 639,004 758,942 713,141 658,339 639,847
1,000)
Ratios to average net assets:
(%)
Expenses .66 .65 .65 .64 .64
Net investment income 5.32 5.17 5.49 5.84 5.96
Portfolio turnover rate (%) 24.21 11.11 12.74 22.24 9.71
</TABLE>
CLASS B
----------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 9.47
period --------------------
Net investment income .04
Net realized and unrealized
gains (losses) .08
--------------------
Total from investment .12
operations
--------------------
Distributions from net
investment income (.04)
--------------------
Net asset value, end of period 9.55
--------------------
Total return (%)7 1.27
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($ x 186 1,000) Ratios to
average net assets: (%)
Expenses 1.21 8
Net investment income 5.06 8
Portfolio turnover rate (%) 24.21
PENNSYLVANIA FUND (CONT.)
CLASS C YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1,2 1999 1998 1997 19963
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.57 10.61 10.43 10.47 10.17
year -----------------------------------------------
Net investment income .48 .49 .52 .55 .47
Net realized and unrealized
gains (losses) (.97) (.03) .33 (.05) .30
------------------------------------------------
Total from investment (.49) .46 .85 .50 .77
operations ------------------------------------------------
Distributions from net
investment income (.48)4 (.49)5 (.53) (.54) (.47)
Distributions from net -6 (.01) (.14) - -
realized gains ------------------------------------------------
Total distributions (.48) (.50) (.67) (.54) (.47)
------------------------------------------------
Net asset value, end of year 9.60 10.57 10.61 10.43 10.47
------------------------------------------------
Total return (%)7 (4.76) 4.50 8.35 4.98 7.71
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 40,973 41,917 25,899 11,935 3,110
1,000)
Ratios to average net assets:
(%)
Expenses 1.21 1.21 1.21 1.21 1.22 8
Net investment income 4.77 4.61 4.89 5.22 5.36 8
Portfolio turnover rate (%) 24.21 11.11 12.74 22.24 9.71
1. Based on average shares outstanding.
2. For the period February 1, 2000 (effective date) to February 29, 2000 for
Class B.
3. For the period May 1, 1995 (effective date) to February 29, 1996 for Class C.
4. Includes distributions in excess of net investment income in the amount of
$.0001.
5. Includes distributions in excess of net investment income in the amount of
$.004.
6. The Fund made a capital gain distribution of $.0002.
7. Total return does not include sales charges, and is not annualized.
8. Annualized.
PUERTO RICO FUND
CLASS A YEAR ENDED FEBRUARY 29,
--------------------------------------------------------------------------------
2000 1 1999 1998 1997 1996 2
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.88 11.86 11.51 11.59 11.31
year ------------------------------------------------
Net investment income .59 .60 .62 .65 .66
Net realized and unrealized
gains (losses) (.92) .06 .36 .02 .30
------------------------------------------------
Total from investment (.33) .66 .98 .67 .96
operations
------------------------------------------------
Distributions from net
investment income (.58) (.60)3 (.62) (.65)3 (.67)4
Distributions from net
realized gains (.02) (.04) (.01) (.10) (.01)
------------------------------------------------
Total distributions (.60) (.64) (.63) (.75) (.68)
------------------------------------------------
Net asset value, end of year 10.95 11.88 11.86 11.51 11.59
------------------------------------------------
Total return (%)5 (2.91) 5.68 8.78 6.03 8.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 195,157 218,753 210,325 192,525 190,577
1,000)
Ratios to average net assets:
(%)
Expenses .74 .74 .75 .73 .74
Net investment income 5.14 4.98 5.35 5.62 5.71
Portfolio turnover rate (%) 13.41 20.19 7.94 21.09 27.99
CLASS C
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 11.89 11.87 11.53 11.62 11.32
year ------------------------------------------------
Net investment income .53 .53 .56 .58 .50
Net realized and unrealized
gains (losses) (.92) .06 .34 .02 .30
------------------------------------------------
Total from investment (.39) .59 .90 .60 .80
operations ------------------------------------------------
Distributions from net
investment income (.51) (.53)6 (.55) (.59) (.49)
Distributions from net
realized gains (.02) (.04) (.01) (.10) (.01)
------------------------------------------------
Total distributions (.53) (.57) (.56) (.69) (.50)
------------------------------------------------
Net asset value, end of year 10.97 11.89 11.87 11.53 11.62
------------------------------------------------
Total return (%)5 (3.37) 5.09 8.07 5.33 7.21
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 7,270 7,050 3,615 1,679 533
1,000)
Ratios to average net assets:
(%)
Expenses 1.30 1.30 1.31 1.30 1.32 7
Net investment income 4.60 4.43 4.78 5.04 5.16 7
Portfolio turnover rate (%) 13.41 20.19 7.94 21.09 27.99
1. Based on average shares outstanding.
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
$.006.
4. Includes distributions in excess of net investment income in the amount of
$.001.
5. Total return does not include sales charges, and is not annualized.
6. Includes distributions in excess of net investment income in the amount of
$.004.
7. 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Class B Class C
--------------------------------------------------------------------------------------
o Initial sales charge of o No initial sales charge o Initial sales charge of 1%
2.25% or less (Federal
Intermediate Fund) or
4.25% or less (all other
Funds)
o Deferred sales charge of o Deferred sales charge o Deferred sales charge 1%
1% on purchases of $1 of 4% on shares you sell on shares you sell
million or more sold within the first year, within 18 months
within 12 months declining to 1% within
six years and eliminated
after that
o Lower annual expenses o Higher annual expenses o Higher annual expenses
than Class B or C due to than Class A (same as than Class A (same as
lower distribution fees Class C) due to higher Class B) due to higher
distribution fees. distribution fees. No
Automatic conversion to conversion to Class A
Class A shares after shares, so annual
eight years, reducing expenses do not decrease.
future annual expenses.
--------------------------------------------------------------------------------------
</TABLE>
THE ARIZONA, NEW JERSEY AND PENNSYLVANIA FUNDS BEGAN
OFFERING CLASS B SHARES ON FEBRUARY 1, 2000.
SALES CHARGES - CLASS A
THE SALES CHARGE MAKES WHICH EQUALS THIS %
UP THIS % OF THE OF YOUR NET
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE INVESTMENT
--------------------------------------------------------------------------------
ALL FUNDS (EXCEPT FEDERAL
INTERMEDIATE)
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
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 44), 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 43). 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 each Fund to pay distribution fees of up
to 10% per year for each Fund, 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
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 43). 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 each 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.
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, 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 50
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]
FRANKLIN TEMPLETON FUNDS include all of the U.S.
registered mutual funds of Franklin Templeton Investments, except Franklin
Templeton Variable Insurance Products Trust and Templeton Capital Accumulator
Fund, Inc.
[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. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class 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
Automatic investment plans $50 $50
UGMA/UTMA accounts $100 $50
Broker-dealer sponsored wrap account $250 $50
programs
Full-time employees, officers, $100 $50
trustees and directors of
Franklin Templeton entities, and
their immediate family members
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE
FOR SALE IN YOUR STATE OR JURISDICTION.
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
"Investor Services" on page 49). For example, if you would like to link one of
your bank accounts to your Fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please complete
the bank information section of the application. We will keep your bank
information on file for future purchases and redemptions.
Buying shares
--------------------------------------------------------------------------------
Opening an account Adding to an account
--------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] Through your representative representative
investment representative
--------------------------------------------------------------------------------
[Insert graphic of phone] If you have another Before requesting a
By Phone Franklin Templeton telephone purchase,
account with your bank please make sure we have
(Up to $100,000 account information on your bank account
per day) file, you may open a new information on file. If
1-800/632-2301 account by phone. The we do not have this
accounts must be information, you will
identically registered. need to send written
instructions with your
To make a same day bank's name and address,
investment, please call a voided check or
us by 1:00 p.m. Pacific savings account deposit
time or the close of the slip, and a signature
New York Stock Exchange, guarantee if the
whichever is earlier. ownership of the bank
and Fund accounts is
different.
To make a same day
investment, please call
us by 1:00 p.m. Pacific
time or the close of the
New York Stock Exchange,
whichever is earlier.
--------------------------------------------------------------------------------
[Insert graphic of Make your check payable
envelope] By Mail to the Fund. Make your check payable
to the Fund. Include
Mail the check and your your account number on
signed application to the check.
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.
--------------------------------------------------------------------------------
(cont.)
Buying shares (cont.)
--------------------------------------------------------------------------------
Opening an account Adding to an account
--------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] By Wire control number and wire control number and wire
instructions. instructions.
1-800/632-2301
(or 1-650/312-2000 Wire the funds and mail To make a same day wire
collect) your signed application investment, please call
to Investor Services. us by 1:00 p.m. Pacific
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] By send signed written below or our automated
Exchange instructions. The TeleFACTS system, or
TeleFACTS system cannot send signed written
TeleFACTS(R) be used to open a new instructions.
1-800/247-1753 account.
(around-the-clock access) (Please see page 50 for
(Please see page 50 for information on
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 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. To sign up, complete the appropriate section of your
account application and mail it to Investor Services. If you are opening a new
account, please include the minimum initial investment of $50 with your
application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a Fund automatically 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 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 buy,
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 Fund 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. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a Fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
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 purchase, 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.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton fund, the time your
*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.
shares are held in that Fund will count towards the eight year period for
automatic conversion to Class A shares.
Because excessive trading can hurt Fund performance, operations and
shareholders, each Fund, effective September 15, 2000, reserves the right to
revise or terminate the exchange privilege, limit the amount or number of
exchanges, reject any exchange, or restrict or refuse purchases if (i) the Fund
or its manager believes the Fund would be harmed or unable to invest
effectively, or (ii) the Fund receives or anticipates simultaneous orders that
may significantly affect the Fund (please see "Market Timers" on page 55).
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. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
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.
[End callout]
A notary public CANNOT provide a signature guarantee.
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
pre-authorized 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 Contact your investment representative
shaking] THROUGH
YOUR INVESTMENT
REPRESENTATIVE
--------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] BY MAIL 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. 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
BY PHONE less, you do not hold share certificates and you
have not changed your address by phone within the
1-800/632-2301 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 three You can call or write to have redemption proceeds
lightning bolts] By sent to a bank account. See the policies above for
Electronic Funds selling shares by mail or phone.
Transfer (ACH)
Before requesting to have redemption proceeds sent
to a bank account, 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, a
voided check or savings account deposit slip, and a
signature guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by 1:00
p.m. Pacific time, proceeds sent by ACH generally
will be available within two to three business days.
--------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you are
arrows pointing in considering.
opposite directions] By
Exchange Call Shareholder Services at the number below or
our automated TeleFACTS system, or send signed
TeleFACTS(R) written instructions. See the policies above for
1-800/247-1753 selling shares by mail or phone.
(around-the-clock
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 quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). 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 copies of all notifications and 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 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, wire or electronic Funds transfer 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.
ALL FUNDS
(EXCEPT FEDERAL INTERMEDIATE) CLASS A CLASS B 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 0.751 - -
12B-1 FEE TO DEALER 0.10 0.152 0.653
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 0.751
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 1% may be paid on Class C NAV purchases. 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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.
This page intentionally left blank.
Investment Company Act file # 811-4149 TF3 P 07/00
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, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 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, 2000, 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 29, 2000, 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
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
State Tax Treatment
-------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT 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
investment management and the 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.
This goal is fundamental, which means that it 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 total
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax. In addition, each state Fund
normally invests at least 80% of its total 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
qualifying municipal securities issued by U.S. territories such as Guam,
Puerto Rico, the Mariana Islands or the U.S. Virgin 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
shareholders 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 that 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 that
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
generally is 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 rise, it lowers a Fund's income when
interest rates fall. Of course, a Fund's income from its variable rate
investments also may increase if interest rates rise.
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 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, its yield 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 a Fund to protect itself from
call risk is to buy bonds with call protection. Call protection is an
assurance that the bond will not be called for a specific time period,
typically five to 10 years from when the bond is issued.
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 AND DELAYED INTEREST 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 generally is more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than bonds paying
interest on a current basis. 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 SECURITIES 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 a Fund to the issuer and no
interest accrues to the Fund. If the other party to the transaction fails to
deliver or pay for the security, the Fund could miss a favorable price or
yield opportunity, or could experience a loss.
When a Fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and includes the value of the security in
the calculation of its net asset value. The Funds do not believe that their
net asset value or income will 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 generally will 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 the manager considers it advisable.
When a Fund is the buyer, it will set aside cash or liquid securities, with
an aggregate value equal to the amount of its purchase commitments, on its
books 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 generally are 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 market or economic
conditions are unusual or unfavorable for investors, the manager may invest
up to 100% of each Fund's assets in a temporary defensive manner by holding
all or a substantial portion of its assets in cash, cash equivalents or other
high quality short-term investments. Unfavorable market or economic
conditions may include excessive volatility or a prolonged general decline in
the securities markets, the securities in which a Fund normally invests, or
the economies of the state and territories where each Fund invests.
Temporary defensive investments may include securities that pay taxable
interest, including (i) for the state Funds, municipal securities issued by a
state or local government other than the Fund's state; (ii) high quality
commercial paper; or (iii) securities issued by or guaranteed by the full
faith and credit of the U.S. government. Each Fund also may invest all of its
assets in municipal securities issued by a U.S. territory such as Guam,
Puerto Rico, the Mariana Islands or the U.S. Virgin Islands. The manager also
may invest in these types of securities or hold cash when securities meeting
the Fund's investment criteria are unavailable or to maintain liquidity.
PORTFOLIO TURNOVER 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. Short-term trading increases portfolio
turnover and may increase costs. However, 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 Ratings Group (S&P(R)), 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 different limitations on the
credit quality of the securities it may buy. These limitations generally are
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.
In addition to considering ratings in its selection of each Fund's portfolio
securities, the manager may consider, among other things, information about
the financial history and condition of the issuer, revenue and expense
prospects and, in the case of revenue bonds, the financial history and
condition of the source of revenue to service the bonds. Securities that
depend on the credit of the U.S. government are regarded as having a triple A
or equivalent rating.
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. The 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 may also 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
security issuer's ability or willingness to meet its obligations.
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. The Fund, however, may invest a portion of its
assets in insured municipal securities covered by policies issued by insurers
with a rating below triple 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.
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 a 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 trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a 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 the need for infrastructure improvements,
increased costs for education and other services, current debt levels, and
the existence of accumulated budget deficits.
The following gives more information about the risks of investing in the
Funds. Please read this information together with the section "What Are the
Risks of Investing in the Funds?" in the Prospectus.
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 reduced
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 1999 was at
its lowest level since the early 1970s.
Arizona's economy has continued to diversify. While Arizona's economy, in
the past was heavily dependent on its farming, mining and real estate
industries, as of 1999, manufacturing accounted for approximately 9.8% of the
state's total employment, trade 23.7%, services 31.4%, government 16.1%, and
construction 7.2%. Farming and mining accounted for less than 2% of the total
workforce. Arizona may be vulnerable, however, to events affecting
high-technology products and to 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. Results from fiscal 1999 show another
operating surplus.
FLORIDA. Florida's population has grown rapidly in recent years, with the
fastest growth among 5-17 year-olds. In the next ten years, the most rapidly
growing population will be in the over 85 age group. The rapid growth in the
population of both the young and old 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, make up a
significant proportion of Florida's income distribution. 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. Florida
projects a balance in the fund of $847 million by fiscal year end 2000,
meeting the required fund level of 5% of the previous year's General Fund
revenues. In addition, the year is expected to close with a $962 million
combined general and working capital balance.
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 needed 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
and unemployment has been around the national rate. Florida's year over year
job growth was among the top three fastest in the nation in 1999. 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 been similar to national levels. Likewise, the
commonwealth's unemployment rates have compared favorably with national
rates. In November 1999, the unemployment rate in Massachusetts was 3.2%,
compared to the national rate of 4.1%. Strong employment growth since 1993,
together with low unemployment rates and slow 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 eight consecutive years of balanced financial operations. At
the same time, the commonwealth has greatly reduced its reliance on temporary
borrowing.
While the commonwealth 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 1999,
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. As of September 30, 1999, the state's budget
stabilization fund was at more than $1 billion. 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 slight
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 $2.0 billion as of June 30, 1999, with
a budgetary reserve of $1.3 billion. With its balances and reserves near
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 December 1999, job growth was 0.8%, compared to
2.2% for the nation. Much of this growth has been concentrated in the
construction and finance, insurance, and real estate sectors. Unemployment
was 4.2% in December 1999, which was the same as the national rate. The
state's population growth also has been slow and, from 94 - 99, 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 up to 35% 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 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 invest. 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.
PUERTO RICO. In recent years, Puerto Rico's financial performance has
improved. Overall, as of March 2000, Moody's considered Puerto Rico's outlook
to be positive. Relatively strong revenue growth and more aggressive tax
collection procedures resulted in a general fund surplus for fiscal 1999
(audited) of $497 million, including an unreserved balance of $185.4 million.
Between fiscal years 1993 and 1999, Puerto Rico has experienced a 4.3% drop
in the unemployment rate, a 54% increase in hotel registrations, a 31% in
retail sales, a 76% increase in exports, and a 22% decrease in welfare
recipients.
While Puerto Rico's debt per capita levels are at the higher end of the
spectrum compared to American states that is partly explained by the fact
that Puerto Rico generally centralizes its debt issuance at the state level.
S&P rates Puerto Rico's general obligation debt at A, with a stable outlook.
Moody's rates the island's general obligation debt at Baa1. The Moody's
rating has been at Baa1 since 1976 and the S&P A-rating has been in place
since 1956. Going forward, these debt 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.
Puerto Rico also faces challenges from 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 are being 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. In the fifth year of this phase-out period,
business continues to show interest in Puerto Rico as manufacturing and
services/commerce continue to represent the largest sector of employment.
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.
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 18, 2000, 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 U.S. territory 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 emigrated 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 $2.575 billion in 1997. By
sector, the breakdown was garment manufacturing 33%, tourism 23%, retail
trade 18%, services 17% and other 9%. Gross business revenue tax collections
totaled $68.6 million in fiscal year 1998. Also in fiscal year 1998, general
fund revenues totaled $234 million while expenditures totaled $238 million.
The population of all the islands combined was 67,212 at fiscal year end 1996
and average earnings per capita totaled $9,702. At fiscal year end 1995, the
most recent year available, unemployment among eligible labor force
participants stood at 2.3%.
U.S. VIRGIN ISLANDS. The U.S. Virgin Islands has suffered numerous years of
budget imbalances. Since fiscal 1989, the Virgin Islands has incurred budget
deficits in all but four fiscal years. As of June 30, 1999, the accumulated
deficit was close to $341 million. To help finance this deficit, the
government issued a $300 million bond, which allowed it to meet a $13 million
payroll payment and to begin to pay off the backlog of payments to vendors.
The Virgin Islands' large public sector payroll (approximately 32.8% of
employment), relatively small private sector that is dependent on tourism and
related services (21% of employment), and heavy reliance on taxes as a
revenue source (close to 97% of all revenues), together with the effects of
three major hurricanes in the past ten years, have contributed to its
financial problems.
The U.S. Virgin Islands are not experiencing the record economic boom that
the mainland is. In 1999, employment decreased 1.7% following two years of
minimal growth. The unemployment rate for 1999 was 4.8%, which is the lowest
level since 1993. The Virgin Islands are highly dependent on tourism, which
contracted in 1999. While the islands have experienced an increase in hotel
occupancy, the majority of visitors come via cruise ships. The number of
cruise ship passengers decreased 12% in 1999, which resulted in an overall
decline of 8% for the year. A significant reason for the decrease in cruise
ships was due to the damage suffered to the docks from recent hurricanes.
After Hurricane Jose in October 1999, only 39 ships were able to dock in
October compared to 65 in October 1998.
In September 1998, the Department of Interior Office of Inspector General
issued an audit report on the Virgin Islands. It noted that while the Virgin
Islands had made improvements in its financial situation, problems remained
in the areas of overall financial management, expenditure control and revenue
collections. To help improve its financial position, the Virgin Islands has
developed a five-year economic recovery plan. Central to this plan is a
reduction in government spending. In June 1999, the governor implemented a
strict hiring freeze and mandated a 5% reduction in personnel expenditures
each year through fiscal 2004, a 50% reduction in overtime expenses, and
various other cost saving initiatives. In October, the government and the
Department of Interior entered into a Memorandum of Understanding stipulating
that federal grants will be awarded contingent on several financial
performance and accountability standards being met that will demonstrate
improvement in the economic and financial condition of the islands. Since the
plan is new, it is not yet certain whether or to what extent the plan will be
successful in helping the Virgin Islands improve its financial condition.
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 (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (68)
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 Franklin Templeton Investments; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 50 of the investment companies in Franklin
Templeton Investments.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the
investment companies in Franklin Templeton Investments; and FORMERLY,
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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
Chairman of the Board and Trustee
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Chairman of the Board,
Franklin Advisers, Inc.; Vice President, 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 Franklin Templeton Investments.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; 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 Franklin
Templeton Investments.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director,
The California Center for Land Recycling (redevelopment); director or
trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, General Partner, Miller & LaHaye and
Peregrine Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 48 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Sheila Amoroso (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc. and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin 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 Franklin Templeton Investments.
Rafael R. Costas, Jr. (35)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, 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.; 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 Franklin Templeton Investments.
Deborah R. Gatzek (51)
1810 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in Franklin Templeton Investments; and FORMERLY, 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,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Counsel, Franklin Resources, Inc; President, Chief Executive Officer and
Director, Franklin Select Realty Trust, Property Resources, Inc., Property
Resources Equity Trust, Franklin Real Estate Management, Inc. and Franklin
Properties, Inc.; officer and director of some of the other subsidiaries of
Franklin Resources, Inc.; officer of 53 of the investment companies in
Franklin Templeton Investments; and FORMERLY, President, Chief Executive
Officer and Director, Franklin Real Estate Income Fund and Franklin Advantage
Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Deputy Director, Division of Investment Management, Executive
Assistant and Senior Advisor to the Chairman, Counselor to the Chairman,
Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial Clerk, U.S.
District Court (District of Massachusetts) (until 1979).
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the other subsidiaries of Franklin Resources, Inc. and of 29 of the
investment companies in Franklin Templeton Investments.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Thomas Walsh (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
*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 Franklin Templeton Investments receive a flat fee of
$2,000 per committee meeting attended, a portion of which is allocated to the
Trust. Members of a committee are not compensated for any committee meeting
held on the day of a board meeting. Noninterested board members also may
serve as directors or trustees of other funds in Franklin Templeton
Investments and may receive fees from these funds for their services. The
fees payable to noninterested board members by the Trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within Franklin Templeton
Investments. The following table provides the total fees paid to
noninterested board members by the Trust and by Franklin Templeton
Investments.
NUMBER OF
BOARDS IN
TOTAL FEES FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES FRANKLIN INVESTMENTS
RECEIVED TEMPLETON ON WHICH
FROM THE INVESTMENTS EACH
NAME TRUST($) 1 ($) 2 SERVES 3
----------------------------------------------------------------
Frank H. Abbott, III 22,999 156,050 28
Harris J. Ashton 25,239 363,165 48
S. Joseph Fortunato 23,511 363,238 50
Edith E. Holiday 31,700 237,265 25
Frank W.T. LaHaye 22,999 156,060 28
Gordon S. Macklin 25,239 363,165 48
1. For the fiscal year ended February 29, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in Franklin Templeton Investments. This number does not include the
total number of series or funds within each investment company for which the
board members are responsible. Franklin Templeton Investments currently
includes 52 registered investment companies, with approximately 157 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
Franklin Templeton Investments 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 Franklin Templeton Investments. 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 Franklin Templeton Investments, 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.
The Funds, their manager and principal underwriter have each adopted a code
of ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for a Fund or that are currently held by the Funds, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the Funds, their manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
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 $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended February 29, 2000, and February 28,
1999 and 1998, the Funds paid the following management fees:
MANAGEMENT FEES PAID ($)
2000 1999 1998
--------------------------------------------------------------------
Arizona Fund 1 511,640 129,625 53,600
Florida Fund 2 705,624 279,543 164,237
Insured Fund 7,715,627 8,186,468 7,894,099
Massachusetts Fund 1,854,148 1,842,232 1,792,766
Michigan Fund 5,567,281 5,623,372 5,414,427
Minnesota Fund 2,541,127 2,591,321 2,465,946
Ohio Fund 3,798,880 3,822,228 3,586,169
1. For the fiscal years ended February 28, 1999 and 1998, management fees,
before any advance waiver, totaled $444,848 and $300,020, 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 29, 2000,and February 28, 1999 and
1998, management fees, before any advance waiver, totaled $718,877, $697,080
and $559,377, 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 each Fund's average daily net assets over $200 million up to
$700 million;
o 0.10% of each Fund's average daily net assets over $700 million up to
$1.2 billion; and
o 0.075% of each Fund's average daily net assets over $1.2 billion.
During the last three fiscal years ended February 29, 2000, and February 28,
1999 and 1998, the manager paid FT Services the following administration fees:
ADMINISTRATION FEES PAID ($)
2000 1999 1998
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Arizona Fund 123,537 101,043 70,517
Florida Fund 178,612 169,903 132,554
Insured Fund 1,826,809 1,895,252 1,847,411
Massachusetts Fund 512,885 506,241 492,589
Michigan Fund 1,458,837 1,465,757 1,420,284
Minnesota Fund 720,407 730,139 693,518
Ohio Fund 1,066,409 1,066,391 1,013,556
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 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 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 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 Franklin Templeton
Investments, 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 29, 2000, and February 28, 1999 and
1998, the Funds did not pay any brokerage commissions.
As of February 29, 2000, 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. Distributions are subject to approval by the board. 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 (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 will be exempt from that state's personal income tax.
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 from many sources, including on any
temporary investments, the discount from stripped obligations or their
coupons, income from securities loans or other taxable transactions, or
ordinary income derived from the sale of market discount bonds. Any
distributions by a Fund from such income will be taxable to you as ordinary
income, whether you 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, to reduce or eliminate excise or income taxes on
the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from the Fund's sale of securities held for more
than five years may be subject to a reduced tax rate.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The Funds will inform you
of the amount of your ordinary income dividends and capital gain
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
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 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
distributions in December (or to pay them in January, in which case you must
treat them as received in December) but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and, generally,
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 any 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.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gains from the sale of Fund shares held for more than five years may be
subject to a reduced tax rate.
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 any 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 is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received
deduction.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while exempt from regular federal income tax, is a preference
item for taxpayers when determining their alternative minimum tax under the
Code and under the income tax provisions of several states. Private activity
bond interest could subject you to or increase your liability under federal
and state alternative minimum taxes, depending on your individual or
corporate tax position. Persons who are defined in the Code as substantial
users (or persons related to such users) of facilities financed by private
activity bonds should consult with their tax advisors before buying 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 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 each 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 Insured, Michigan and Ohio Funds currently offer three classes of shares,
Class A, Class B and Class C. The Funds began offering Class B shares on
February 1, 2000. The Massachusetts and Minnesota Funds currently offer two
classes of shares, Class A and Class C. The full title of each class is:
o Franklin Insured Tax-Free Income Fund - Class A
o Franklin Insured Tax-Free Income Fund - Class B
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 B
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 B
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 each Fund's assets.
On matters that affect a 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 June 2, 2000, the principal shareholders of the Fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE
(%)
-------------------------------------------------------
NFSC FEBO
Valley Concrete Materials
P.O. Box 634
Cottonwood, AZ 86326 Class A 7.34
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 June 2, 2000, 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 Franklin
Templeton Investments.
BUYING AND SELLING SHARES
-------------------------------------------------------------------------------
Each Fund continuously offers their 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 a Fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of a 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. We may deduct any applicable banking
charges imposed by the bank from your account.
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. There is no initial sales charge for Class B.
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 Franklin Templeton funds to take advantage of the
lower sales charges for large purchases. Franklin Templeton funds include the
U.S. registered mutual funds in the Franklin Templeton Investments, except
Franklin Templeton Variable Insurance Products Trust and Templeton Capital
Accumulator Fund, Inc.
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
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 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 Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust. 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 investing 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 may accept orders for these accounts 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 Franklin
Templeton Investments 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 Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales
of fund shares and/or total assets with Franklin Templeton Investments. 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 Franklin Templeton Investments; 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 Franklin Templeton
Investments. 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 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.
For Class B shares, 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 MANY YEARS THIS % IS DEDUCTED
AFTER BUYING THEM FROM 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 generally are
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.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account on the day of the month you have indicated
on your account application or, if no day is indicated, on the 20th day of
the month. If that day falls on a weekend or holiday, we will process the
redemption on the next business day. For plans set up before June 1, 2000, we
will continue to process redemptions on the 25th day of the month (or the
next business day) unless you instruct us to change the processing date.
Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and
25th days of the month. 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.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The Funds
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically if all shares in
your account are withdrawn or if the Funds receive 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.
The Funds do not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH 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.
There are special procedures for banks and other institutions that wish to
open multiple accounts. An institution may open a single master account by
filing one application form with a Fund, signed by personnel authorized to
act for the institution. Individual sub-accounts may be opened when the
master account is opened by listing them on the application, or by providing
instructions to the Fund at a later date. These sub-accounts may be
registered either by name or number. Each Fund's investment minimums apply to
each sub-account. Each Fund will send confirmation and account statements for
the sub-accounts to the institution.
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 29, 2000, and February 28, 1999 and 1998:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
-------------------------------------------------------------------
2000
Arizona Fund 319,177 20,511 10,224
Florida Fund 347,787 24,507 1,130
Insured Fund 2,135,976 134,057 78,535
Massachusetts Fund 861,945 54,163 29,631
Michigan Fund 2,163,050 128,077 56,030
Minnesota Fund 819,118 46,686 37,510
Ohio Fund 1,699,643 105,552 81,934
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
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 The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the Fund, encourage sales of the Fund and service to its
shareholders, and increase or maintain assets of the Fund so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the Fund is
useful in managing the Fund because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." 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. The Fund may pay up to 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. The Class A plan is a reimbursement plan. It allows
the Fund to reimburse Distributors for eligible expenses that Distributors
has shown it has incurred. The Fund will not reimburse more than the maximum
amount allowed under the plan. Except for the Arizona and Florida Funds'
expenses, any unreimbursed expenses from one year may not be carried over to
or reimbursed in later years.
For the fiscal year ended February 29, 2000, the amounts paid by the Funds
pursuant to the Class A plan were:
ARIZONA FLORIDA INSURED MASSACHUSETTS
FUND FUND FUND FUND
($) ($) ($) ($)
------------------------------------------------------------------------
Advertising 2,727 2,765 109,405 27,098
Printing and mailing
prospectuses other
than to current
shareholders 1,364 2,092 50,011 9,067
Payments to
underwriters 1,087 1,319 26,644 6,043
Payments to
broker-dealers 74,195 108,736 1,115,860 240,853
Other 3,593 5,101 139,646 24,458
-----------------------------------------------
Total 82,966 120,013 1,441,566 307,519
===============================================
MICHIGAN MINNESOTA OHIO FUND
FUND FUND
($) ($) ($)
----------------------------------------------------------------
Advertising 57,198 36,385 45,565
Printing and mailing
prospectuses other
than to current
shareholders 34,987 15,132 21,948
Payments to
underwriters 24,931 7,600 14,647
Payments to
broker-dealers 802,911 343,930 539,088
Other 111,069 39,648 68,955
---------------------------------------
Total 1,031,096 442,695 690,203
=======================================
THE CLASS B AND C PLANS. Each Fund pays Distributors up to 0.65% per year of
the class's average daily net assets, out of which 0.15% may be used for
service fees. The Class B and C plans also may be used to pay Distributors
for advancing commissions to securities dealers with respect to the initial
sale of Class B and C shares. Class B plan fees payable to Distributors are
used by Distributors to pay third party financing entities that have provided
financing to Distributors in connection with advancing commissions to
securities dealers.
The Class B and C plans are compensation plans. They allow each Fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors
has incurred at the time of the payment. Distributors must, however,
demonstrate to the board that it has spent or has immediate plans to spend
the amount received on eligible expenses. Each Fund will not pay more than
the maximum amount allowed under the plans.
For the fiscal year ended February 29, 2000, the Funds paid no fees pursuant
to the Class B plan and the amounts paid by the Funds pursuant to the Class C
plan were:
ARIZONA FLORIDA INSURED MASSACHUSETTS
FUND FUND FUND FUND
($) ($) ($) ($)
------------------------------------------------------------------------
Advertising -- -- 10,772 6,100
Printing and mailing
prospectuses other
than to current
shareholders -- -- 3,067 1,275
Payments to
underwriters -- -- 6,236 2,280
Payments to
broker-dealers -- -- 374,683 156,360
Other -- -- 17,005 9,146
-----------------------------------------------
-- -- 411,763 175,161
===============================================
MICHIGAN MINNESOTA OHIO FUND
FUND FUND
($) ($) ($)
-------------------------------------------------------------
Advertising 5,937 3,560 5,822
Printing and mailing
prospectuses other
than to current
shareholders 2,034 950 1,786
Payments to
underwriters 4,571 2,482 3,332
Payments to
broker-dealers 318,580 133,437 257,946
Other 12,449 5,708 9,117
------------------------------------
Total 343,571 146,137 278,003
====================================
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.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
-------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Funds
are based on the standardized methods of computing performance mandated by
the SEC. 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 for Class A and C
shares, 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 29, 2000, were:
INCEPTION 1 YEAR 5 YEARS (%) 10 YEARS SINCE
DATE (%) (%) INCEPTION
(%)
-----------------------------------------------------------------------
CLASS A
Arizona Fund 4/30/93 -8.72 4.48 - 4.29
Florida Fund 4/30/93 -8.31 4.53 - 3.92
Insured Fund 4/03/85 -7.29 3.84 5.84 7.18
Massachusetts 4/03/85 -7.45 3.82 5.69 6.55
Fund
Michigan Fund 4/03/85 -6.74 4.17 5.94 6.96
Minnesota Fund 4/03/85 -7.42 3.43 5.36 6.79
Ohio Fund 4/03/85 -6.90 4.02 5.88 6.94
-----------------------------------------------------------------------
SINCE
INCEPTION
(%)
-----------------------------------------------------------------------
CLASS B
Insured Fund 2/01/00 -2.69
Michigan Fund 2/01/00 -2.89
Ohio Fund 2/01/00 -2.81
-----------------------------------------------------------------------
1 YEAR (%) SINCE
INCEPTION
(%)
-----------------------------------------------------------------------
CLASS C
Insured Fund 5/01/95 -5.57 3.98
Massachusetts
Fund 5/01/95 -5.66 3.93
Michigan Fund 5/01/95 -4.96 4.32
Minnesota Fund
5/01/95 -5.68 3.52
Ohio Fund 5/01/95 -5.31 4.17
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, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
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
29, 2000, were:
INCEPTION 1 YEAR 5 YEARS (%) 10 YEARS SINCE
DATE (%) (%) INCEPTION
(%)
-----------------------------------------------------------------------
CLASS A
Arizona Fund 4/30/93 -8.72 24.52 - 33.26
Florida Fund 4/30/93 -8.31 24.78 - 30.01
Insured Fund 4/03/85 -7.29 20.71 76.32 181.28
Massachusetts 4/03/85 -7.45 20.61 73.99 157.35
Fund
Michigan Fund 4/03/85 -6.74 22.68 78.00 172.79
Minnesota Fund 4/03/85 -7.42 18.34 68.64 166.38
Ohio Fund 4/03/85 -6.90 21.78 77.03 171.76
SINCE
INCEPTION
(%)
-----------------------------------------------------------------------
CLASS B
Insured Fund 2/01/00 -2.69
Michigan Fund 2/01/00 -2.89
Ohio Fund 2/01/00 -2.81
-----------------------------------------------------------------------
SINCE
1 YEAR INCEPTION
(%) (%)
-----------------------------------------------------------------------
CLASS C
Insured Fund 5/01/95 -5.57 20.73
Massachusetts -5.66 20.47
Fund 5/01/95
Michigan Fund 5/01/95 -4.96 22.70
Minnesota Fund -5.68 18.20
5/01/95
Ohio Fund 5/01/95 -5.31 21.82
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 29, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------
Arizona Fund 4.77 - -
Florida Fund 4.72 - -
Insured Fund 4.96 4.66 4.58
Massachusetts 4.91 - 4.53
Fund
Michigan Fund 4.82 4.46 4.44
Minnesota Fund 4.92 - 4.53
Ohio Fund 4.94 4.61 4.57
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
29, 2000, were:
CLASS A CLASS B (%) CLASS C
(%) (%)
---------------------------------------------------
Arizona Fund 8.32 - -
Florida Fund 7.81 - -
Insured Fund 8.21 7.72 7.58
Massachusetts 8.64 - 7.97
Fund
Michigan Fund 8.35 7.72 7.69
Minnesota Fund 8.85 - 8.15
Ohio Fund 9.06 8.46 8.38
As of February 29, 2000, the combined federal and state income tax rate
upon which the taxable-equivalent yield quotations were based were as
follows:
COMBINED RATE (%)
--------------------------------------
Arizona Fund 42.64
Florida Fund 39.60
Insured Fund 39.60
Massachusetts Fund 43.19
Michigan Fund 42.26
Minnesota Fund 44.43
Ohio Fund 45.48
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 that 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 29,
2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------
Arizona Fund 4.72 - -
Florida Fund 4.79 - -
Insured Fund 5.16 4.84 4.76
Massachusetts 5.08 - 4.66
Fund
Michigan Fund 5.03 4.69 4.62
Minnesota Fund 5.01 - 4.61
Ohio Fund 5.04 4.70 4.65
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 29, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------
Arizona Fund 8.23 - -
Florida Fund 7.93 - -
Insured Fund 8.54 8.01 7.88
Massachusetts 8.94 - 8.20
Fund
Michigan Fund 8.71 8.12 8.00
Minnesota Fund 9.02 - 8.30
Ohio Fund 9.24 8.62 8.53
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
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in a 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 Smith Barney 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 Smith Barney 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(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) 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.
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. 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 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 Franklin Templeton Investments, 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 approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together,
Franklin Templeton Investments has over $225 billion in assets under
management for more than 5 million U.S. based mutual fund shareholder and
other accounts. Franklin Templeton Investments offers 105 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 $43 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 14, 1999.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 2000, 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 2000). 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.
DESCRIPTION OF RATINGS
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MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 As a result of Section 43-1021(4) of the Arizona Income Tax Code,
interest on obligations of the state of Arizona or its political subdivisions
is exempt from the Arizona individual income tax. Section 43-1022(6) provides
similar tax-exempt treatment for interest on obligations of the U.S. Pursuant
to Arizona Individual Income Tax Ruling 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, such as 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 and are
taxed at ordinary income tax rates.
FLORIDA Although Florida does not impose a personal income tax, it does
impose an intangible personal property tax on intangible property having a
taxable situs in Florida. This tax is imposed on the value of certain
intangible personal property, including shares of a mutual fund. However,
according to Florida Statute Section 199.185, there is an exemption for
shares of a mutual fund, such as the Florida Fund, that is organized as a
business trust, if, on the January 1 assessment date, at least 90% of the net
asset value of the portfolio of assets corresponding to such shares consists
of exempt property. Exempt property includes notes, bonds and other
obligations issued by the state of Florida or its municipalities, counties
and other taxing districts or by the U.S. government and its agencies. If, on
the date of assessment, the 90% threshold is not met, only that portion, if
any, of the value of the mutual fund shares attributable to notes, bonds and
obligations of the U.S. government and its agencies will be exempt.
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. Pursuant to Michigan
Revenue Administrative Bulletin 1989-10, this includes direct obligations of
the U.S. government, its agencies, instrumentalities, or possessions
(including Puerto Rico, Guam and the Virgin Islands).
Michigan 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 from
obligations of other states and their political subdivisions are fully
taxable. To the extent that such taxable investments are made by the fund,
such as 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 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
JULY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 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, 2000, 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 29, 2000, 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 11
Management and Other Services 14
Portfolio Transactions 15
Distributions and Taxes 16
Organization, Voting Rights
and Principal Holders 17
Buying and Selling Shares 18
Pricing Shares 24
The Underwriter 24
Performance 26
Miscellaneous Information 30
Description of Ratings 30
State Tax Treatment 33
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT 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 investment
management and the 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. This goal is fundamental,
which means that it 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 total
assets in securities that pay interest free from federal income taxes, including
the federal alternative minimum tax. In addition, each state Fund normally
invests at least 80% of its total 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.
Municipal securities issued by a Fund's state or that state's counties,
municipalities, authorities, agencies, or other subdivisions, as well as
qualifying municipal securities issued by U.S. territories such as Guam, Puerto
Rico, the Mariana Islands or the U.S. Virgin 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 shareholders 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 that 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 that
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
generally is 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 rise, it lowers a Fund's income when interest rates
fall. Of course, a Fund's income from its variable rate investments also may
increase if interest rates rise.
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, its yield 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 a Fund to protect itself from call risk is to buy bonds with call
protection. Call protection is an assurance that the bond will not be called for
a specific time period, typically five to 10 years from when the bond is issued.
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 AND DELAYED INTEREST 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 generally is more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, when interest rates rise, zero-coupon securities fall
more dramatically in value than bonds paying interest on a current basis. 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 SECURITIES 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 a Fund to the issuer and no interest accrues
to the Fund. If the other party to the transaction fails to deliver or pay for
the security, the Fund could miss a favorable price or yield opportunity, or
could experience a loss.
When a Fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and includes the value of the security in the
calculation of its net asset value. The Funds do not believe that their net
asset value or income will 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 generally will 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 the manager considers it advisable. When a Fund is
the buyer, it will set aside cash or liquid securities, with an aggregate value
equal to the amount of its purchase commitments, on its books 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 generally are 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 market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
each Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Unfavorable market or economic conditions may
include excessive volatility or a prolonged general decline in the securities
markets, the securities in which a Fund normally invests, or the economies of
the state and territories where each Fund invests.
Temporary defensive investments may include securities that pay taxable
interest, including (i) for the state Funds, municipal securities issued by a
state or local government other than the Fund's state; (ii) high quality
commercial paper; or (iii) securities issued by or guaranteed by the full faith
and credit of the U.S. government. Each Fund also may invest all of its assets
in municipal securities issued by a U.S. territory such as Guam, Puerto Rico,
the Mariana Islands or the U.S. Virgin Islands. The manager also may invest in
these types of securities or hold cash when securities meeting the Fund's
investment criteria are unavailable or to maintain liquidity.
PORTFOLIO TURNOVER 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. Short-term trading increases portfolio turnover
and may increase costs. However, 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 Ratings Group (S&P(R)), 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 different limitations on the
credit quality of the securities it may buy. These limitations generally are
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.
In addition to considering ratings in its selection of each Fund's portfolio
securities, the manager may consider, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. Securities that depend on the credit of
the U.S. government are regarded as having a triple A or equivalent rating.
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 Franklin Templeton Investments 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 trying to
maximize 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 the need for infrastructure improvements, increased costs for
education and other services, current debt levels, and the existence of
accumulated budget deficits.
The following gives more information about the risks of investing in the Funds.
Please read this information together with the section "What Are the Risks of
Investing in the Funds?" in the Prospectus.
ALABAMA. Alabama's economic base has continued to expand and diversify. Although
manufacturing has remained an important part of the economy, the trade,
construction, transportation and service sectors have supplied most 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. In the next ten years, the most rapidly
growing population will be in the over 85 age group. The rapid growth in the
population of both the young and old 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, make up a
significant proportion of Florida's income distribution. 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. Florida projects a balance in the fund of $847
million by fiscal year end 2000, meeting the required fund level of 5% of the
previous year's General Fund revenues. In addition, the year is expected to
close with a $962 million combined general and working capital balance.
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 needed 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 and
unemployment has been around the national rate. Florida's year over year job
growth was among the top three fastest in the nation in 1999. 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 terms of
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 five fiscal years from 1995 to 1999, and also has fully funded its
reserves. The changes to the state's tax laws did not reduce tax revenues in
fiscal 1999 so that there has been no 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 eight 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 1999 were positive, with a general fund balance of $487.5
million. This was the sixth 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
dedicated annual surpluses to debt prepayment or to one-time expenditures.
Therefore, the unreserved portion of its General Fund reserves remain relatively
low at $135 million or 1.3% of expenditures. 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 could affect the state's
performance in future years.
MARYLAND. Maryland's economic base continues to be well diversified. The state's
leading employment and income sectors have been services (34%), trade (23%) 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 three 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 the next
five years. Taking the tax cut into consideration, budget forecasts show an
operating deficit beginning 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 1999, the state
unemployment rate was 4.2%, which was in line with the U.S. average. The service
sector now comprises the largest source of the state's employment at 28%.
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. However, Missouri's
financial position weakened somewhat at the end of 1999, as evidenced by a
general fund deficit of $262 million in spite of positive performance, such as a
5.5% increase in general fund revenues. During the first half of the fiscal year
2000, state general revenues increased 3.4% and sales and use tax collections
increased 4.9%. Spending on school reform will continue to be a challenge for
the state.
NORTH CAROLINA. In recent years, North Carolina's economy has experienced strong
growth. From 1994 to 1999, job growth was 2.9%, slightly ahead of the national
rate of 2.4%. 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 1999, unemployment was a low 3.2%, well below the national average. The
state's low unemployment rate, however, could create tight labor markets and
constrain future economic growth.
North Carolina's outstanding debt continued to increase in 1999 after doubling
over the previous two years 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. Similar to the past 6 years,
the state ended fiscal 1999 with a positive fund balance. However, although
surpluses before were used to increase its reserves, North Carolina will spend
$300 million of the $500 million in its Savings Reserve Account to rebate taxes
deemed illegal by the North Carolina Supreme Court. Additional 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 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 the end of 1999, was second only to
California in non-farm job creation. 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. Texas exports reached $91
billion in 1999 and have grown by 52% 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 $697 million for fiscal 1999. 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, on a per capita basis the state's debt has
remained below the national average.
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
has been paid in full as of 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 up to 35% 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 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 invest. 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.
PUERTO RICO. In recent years, Puerto Rico's financial performance has improved.
Overall, as of March 2000, Moody's considered Puerto Rico's outlook to be
positive. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1999 (audited) of $497
million, including an unreserved balance of $185.4 million. Between fiscal years
1993 and 1999, Puerto Rico has experienced a 4.3% drop in the unemployment rate,
a 54% increase in hotel registrations, a 31% in retail sales, a 76% increase in
exports, and a 22% decrease in welfare recipients.
While Puerto Rico's debt per capita levels are at the higher end of the spectrum
compared to American states that is partly explained by the fact that Puerto
Rico generally centralizes its debt issuance at the state level. S&P rates
Puerto Rico's general obligation debt at A, with a stable outlook. Moody's rates
the island's general obligation debt at Baa1. The Moody's rating has been at
Baa1 since 1976 and the S&P A-rating has been in place since 1956. Going
forward, these debt 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.
Puerto Rico also faces challenges from 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 are being 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. In the fifth year of this phase-out period, business continues to
show interest in Puerto Rico as manufacturing and services/commerce continue to
represent the largest sector of employment.
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.
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 18, 2000, 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 U.S. territory 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 emigrated 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 $2.575 billion in 1997. By sector, the breakdown was
garment manufacturing 33%, tourism 23%, retail trade 18%, services 17% and other
9%. Gross business revenue tax collections totaled $68.6 million in fiscal year
1998. Also in fiscal year 1998, general fund revenues totaled $234 million while
expenditures totaled $238 million.
The population of all the islands combined was 67,212 at fiscal year end 1996
and average earnings per capita totaled $9,702. At fiscal year end 1995, the
most recent year available, unemployment among eligible labor force participants
stood at 2.3%.
U.S. VIRGIN ISLANDS. The U.S. Virgin Islands has suffered numerous years of
budget imbalances. Since fiscal 1989, the Virgin Islands has incurred budget
deficits in all but four fiscal years. As of June 30, 1999, the accumulated
deficit was close to $341 million. To help finance this deficit, the government
issued a $300 million bond, which allowed it to meet a $13 million payroll
payment and to begin to pay off the backlog of payments to vendors. The Virgin
Islands' large public sector payroll (approximately 32.8% of employment),
relatively small private sector that is dependent on tourism and related
services (21% of employment), and heavy reliance on taxes as a revenue source
(close to 97% of all revenues), together with the effects of three major
hurricanes in the past ten years, have contributed to its financial problems.
The U.S. Virgin Islands are not experiencing the record economic boom that the
mainland is. In 1999, employment decreased 1.7% following two years of minimal
growth. The unemployment rate for 1999 was 4.8%, which is the lowest level since
1993. The Virgin Islands are highly dependent on tourism, which contracted in
1999. While the islands have experienced an increase in hotel occupancy, the
majority of visitors come via cruise ships. The number of cruise ship passengers
decreased 12% in 1999, which resulted in an overall decline of 8% for the year.
A significant reason for the decrease in cruise ships was due to the damage
suffered to the docks from recent hurricanes. After Hurricane Jose in October
1999, only 39 ships were able to dock in October compared to 65 in October 1998.
In September 1998, the Department of Interior Office of Inspector General issued
an audit report on the Virgin Islands. It noted that while the Virgin Islands
had made improvements in its financial situation, problems remained in the areas
of overall financial management, expenditure control and revenue collections. To
help improve its financial position, the Virgin Islands has developed a
five-year economic recovery plan. Central to this plan is a reduction in
government spending. In June 1999, the governor implemented a strict hiring
freeze and mandated a 5% reduction in personnel expenditures each year through
fiscal 2004, a 50% reduction in overtime expenses, and various other cost saving
initiatives. In October, the government and the Department of Interior entered
into a Memorandum of Understanding stipulating that federal grants will be
awarded contingent on several financial performance and accountability standards
being met that will demonstrate improvement in the economic and financial
condition of the islands. Since the plan is new, it is not yet certain whether
or to what extent the plan will be successful in helping the Virgin Islands
improve its financial condition.
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 (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (68)
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 Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Chairman of the Board, General Host Corporation
(nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in Franklin Templeton
Investments.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the investment
companies in Franklin Templeton Investments; and FORMERLY, 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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Investment Advisory Services, Inc.; Chairman of the Board, Franklin
Advisers, Inc.; Vice President, 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 Franklin Templeton Investments.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc., Franklin Investment Advisory Services,
Inc. and Franklin/Templeton Investor Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 Franklin Templeton Investments.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Recycling (redevelopment); director or trustee, as
the case may be, of 28 of the investment companies in Franklin Templeton
Investments; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 48 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Sheila Amoroso (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin 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 Franklin Templeton
Investments.
Rafael R. Costas, Jr. (35)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and Chief
Operating Officer, Franklin Resources, Inc.; Senior Vice President, Chief
Financial Officer and Director, Franklin/Templeton Investor Services, Inc.;
Senior Vice President and Chief Financial Officer, 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.; 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 Franklin
Templeton Investments.
Deborah R. Gatzek (51)
1810 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the investment
companies in Franklin Templeton Investments; and FORMERLY, 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, and Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services, Inc.
(until January 2000).
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Counsel, Franklin Resources, Inc; President, Chief Executive Officer and
Director, Franklin Select Realty Trust, Property Resources, Inc., Property
Resources Equity Trust, Franklin Real Estate Management, Inc. and Franklin
Properties, Inc.; officer and director of some of the other subsidiaries of
Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin
Templeton Investments; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of some of the other subsidiaries of Franklin Resources, Inc. and of 53
of the investment companies in Franklin Templeton Investments; and FORMERLY,
Deputy Director, Division of Investment Management, Executive Assistant and
Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and
Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995), Attorney,
Rogers & Wells (until 1986), and Judicial Clerk, U.S. District Court (District
of Massachusetts) (until 1979).
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the other subsidiaries of Franklin Resources, Inc. and of 29 of the
investment companies in Franklin Templeton Investments.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer
of 53 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
Thomas Walsh (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
*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 Franklin Templeton Investments receive a flat fee of $2,000
per committee meeting attended, a portion of which is allocated to the Trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in Franklin Templeton Investments and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the Trust are subject to reductions resulting from fee caps
limiting the amount of fees payable to board members who serve on other boards
within Franklin Templeton Investments. The following table provides the total
fees paid to noninterested board members by the Trust and by Franklin Templeton
Investments.
NUMBER OF
BOARDS IN
TOTAL FEES FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON
RECEIVED FRANKLIN INVESTMENTS
FROM THE TEMPLETON ON WHICH EACH
NAME TRUST($) 1 INVESTMENTS($) 2 SERVES 3
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Frank H. Abbott, III 22,999 156,050 28
Harris J. Ashton 25,239 363,165 48
S. Joseph Fortunato 23,511 363,238 50
Edith E. Holiday 31,700 237,265 25
Frank W.T. LaHaye 22,999 156,060 28
Gordon S. Macklin 25,239 363,165 48
1. For the fiscal year ended February 29, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in Franklin Templeton Investments. This number does not include the total number
of series or funds within each investment company for which the board members
are responsible. Franklin Templeton Investments currently includes 52 registered
investment companies, with approximately 157 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 Franklin Templeton
Investments for which they serve as director or trustee. No officer or board
member received any other compensation, including pension or retirement
benefits, directly or indirectly from the Funds or other funds in Franklin
Templeton Investments. 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 Franklin Templeton Investments, 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.
The Funds, their manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for a Fund or that are currently held by the Funds, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the Funds, their manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
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 $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a Fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended February 29, 2000, and February 28, 1999
and 1998, the Funds paid the following management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------------
2000 1999 1998
Alabama Fund 1,322,835 1,332,672 1,189,527
Florida Fund 8,076,283 8,253,117 7,419,693
Georgia Fund 1,008,098 990,149 872,451
Kentucky Fund 1 177,706 143,286 81,200
Louisiana Fund 946,909 908,906 758,170
Maryland Fund 1,424,210 1,369,242 1,166,952
Missouri Fund 2,044,766 1,860,465 1,574,188
North Carolina Fund 1,968,656 1,834,435 1,566,067
Texas Fund 733,060 786,294 770,725
Virginia Fund 1,969,003 1,958,381 1,689,780
1. For the fiscal years ended February 29, 2000, February 28 1999 and 1998,
management fees, before any advance waiver, totaled $412,900, $377,311 and
$304,904, 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 each Fund's average daily net assets over $200 million up to
$700 million;
o 0.10% of each Fund's average daily net assets over $700 million up to
$1.2 billion; and
o 0.075% of each Fund's average daily net assets over $1.2 billion.
During the last three fiscal years ended February 29, 2000, and February 28,
1999 and 1998, the manager paid FT Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------------
2000 1999 1998
----------------------------------------------------------------------
Alabama Fund 355,294 353,966 315,821
Florida Fund 1,886,005 1,902,604 1,761,352
Georgia Fund 265,346 257,705 223,366
Kentucky Fund 99,013 89,842 72,518
Louisiana Fund 245,118 233,010 188,768
Maryland Fund 384,188 362,711 309,059
Missouri Fund 568,299 508,048 424,634
North Carolina Fund 546,466 501,620 422,191
Texas Fund 183,786 198,223 193,355
Virginia Fund 548,267 539,321 458,682
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 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 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 Franklin Templeton Investments, 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 29, 2000, and February 28, 1999 and 1998,
the Funds did not pay any brokerage commissions.
As of February 29, 2000, 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.
Distributions are subject to approval by the board. 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 (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 will be exempt from that state's personal income tax. 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 from many sources, including on any temporary
investments, the discount from stripped obligations or their coupons, income
from securities loans or other taxable transactions, or ordinary income derived
from the sale of market discount bonds. Any distributions by a Fund from such
income will be taxable to you as ordinary income, whether you 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, to reduce or eliminate excise or income taxes on the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from the Fund's sale of securities held for more than
five years may be subject to a reduced tax rate.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The Funds will inform you of
the amount of your ordinary income dividends and capital gain 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 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 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 distributions in December
(or to pay them in January, in which case you must treat them as received in
December) but can give no assurances that its distributions will be sufficient
to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and generally
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 any 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.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gains from the sale of Fund shares held for more than five years may be subject
to a reduced tax rate.
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 any 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 is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received deduction.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while exempt from regular federal income tax, is a preference item for
taxpayers when determining their alternative minimum tax under the Code and
under the income tax provisions of several states. Private activity bond
interest could subject you to or increase your liability under federal and state
alternative minimum taxes, depending on your individual or corporate tax
position. Persons who are defined in the Code as substantial users (or persons
related to such users) of facilities financed by private activity bonds should
consult with their tax advisors before buying 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 each 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 Florida and Kentucky Funds, currently offers two classes
of shares, Class A and Class C. The Florida Fund currently offers three classes
of shares, Class A, Class B and Class C. The Florida Fund began offering Class B
shares on February 1, 2000. The Funds may offer additional classes of shares in
the future. 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 B
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 a 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 June 2, 2000, the principal shareholders of the Funds, beneficial or of
record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
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TEXAS FUND
Family Ltd. Partnership Class C 6.64
Alo Family Limited
4512 Teas St.
Bellaire, TX 77401-4223
PaineWebber For the Benefit of
Timothy A. Costello Class C 6.45
9501 Bell Mountain Dr.
Austin, TX 78730-2712
First Clearing Corporation Class C 5.03
Ethan W. Grace C. Dodgen
Revocable Living Tr
4831 W. Lawther Drive
Dallas, TX 75214-1849
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 June 2, 2000, 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 Franklin Templeton
Investments.
BUYING AND SELLING SHARES
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Each Fund continuously offers their 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 a Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of a 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. We may deduct any applicable banking charges
imposed by the bank from your account.
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. There is no initial sales charge for Class B.
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 Templeton Variable Insurance Products
Trust and Templeton Capital Accumulator Fund, Inc.
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 Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust. 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 investing 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 may accept orders for these accounts 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 Investments, 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 Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales of
fund shares and/or total assets with Franklin Templeton Investments. 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 Franklin
Templeton Investments; 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 Franklin Templeton Investments. 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.
For Class B shares, 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 MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
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 generally are 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.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. A Fund may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the Funds receive 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. The Funds do not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH 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.
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with a Fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
Fund at a later date. These sub-accounts may be registered either by name or
number. Each Fund's investment minimums apply to each sub-account. Each Fund
will send confirmation and account statements for the sub-accounts to the
institution.
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 on page 25 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 29, 2000,
and February 28, 1999 and 1998:
AMOUNT
RECEIVED IN
CONNECTION
WITH
AMOUNT REDEMPTIONS
TOTAL RETAINED BY AND
COMMISSIONS DISTRIBUTORS REPURCHASES
RECEIVED ($) ($) ($)
--------------------------------------------------------------------
2000
Alabama Fund 624,909 39,449 9,329
Florida Fund 3,006,465 185,581 111,775
Georgia Fund 511,135 31,316 17,239
Kentucky Fund 371,403 24,773 -
Louisiana Fund 548,792 34,132 41,092
Maryland Fund 864,012 52,768 19,255
Missouri Fund 1,430,784 90,808 30,196
North Carolina Fund 1,125,627 66,963 40,672
Texas Fund 133,956 7,798 6,270
Virginia Fund 1,130,274 73,691 42,643
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
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 The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its shareholders.
The plans are expected to, among other things, increase advertising of the Fund,
encourage sales of the Fund and service to its shareholders, and increase or
maintain assets of the Fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the Fund is useful in managing the Fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates who provide service or account maintenance to shareholders (service
fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." 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. Each Fund may pay up to 0.10% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows the Fund
to reimburse Distributors for eligible expenses that Distributors has shown it
has incurred. The Fund will not reimburse more than the maximum amount allowed
under the plan. Any unreimbursed expenses from one year may not be carried over
to or reimbursed in later years.
For the fiscal year ended February 29, 2000, the amounts paid by the Funds
pursuant to the Class A plan were:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ALABAMA FUND FLORIDA GEORGIA KENTUCKY LOUISIANA
FUND FUND FUND FUND
($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------
Advertising 12,120 109,564 13,654 4,406 10,830
Printing and mailing
prospectuses other
than to current
shareholders 8,359 47,271 4,390 1,399 4,186
Payments to
underwriters 4,754 34,090 2,864 963 3,341
Payments to
broker-dealers 174,811 1,263,021 128,091 55,899 118,880
Other 20,395 146,659 11,139 3,416 12,535\
============================================================
Total 220,439 1,600,605 160,138 66,083 149,772
============================================================
MARYLAND MISSOURI NORTH TEXAS FUND VIRGINIA
FUND FUND CAROLINA FUND FUND
($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------
Advertising 14,517 24,996 21,156 11,417 23,125
Printing and mailing
prospectuses other
than to current
shareholders 7,492 8,607 8,932 5,029 10,715
Payments to
underwriters 5,737 10,298 8,438 584 7,233
Payments to
broker-dealers 192,967 289,865 262,808 81,933 280,761
Other 21,550 31,839 30,384 6,868 31,890
============================================================
Total 242,263 365,605 331,718 105,831 353,724
============================================================
</TABLE>
THE CLASS B AND C PLANS. Each Fund pays Distributors up to 0.65% per year of the
class's average daily net assets, out of which 0.15% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for advancing
commissions to securities dealers with respect to the initial sale of Class B
and C shares. Class B plan fees payable to Distributors are used by Distributors
to pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
The Class B and C plans are compensation plans. They allow each Fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors has
incurred at the time of the payment. Distributors must, however, demonstrate to
the board that it has spent or has immediate plans to spend the amount received
on eligible expenses. Each Fund will not pay more than the maximum amount
allowed under the plans.
For the fiscal year ended February 29, 2000, the Funds paid no fees pursuant to
the Class B plan and the amounts paid by the Funds pursuant to the Class C plan
were:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA
FUND FUND FUND FUND FUND
($) ($) ($) ($)
-------------------------------------------------------------------------------------
Advertising 1,989 13,156 4,255 - 2,052
Printing and mailing
prospectuses other
than to current
shareholders 984 3,334 1,160 - 636
Payments to
underwriters 1,635 5,923 1,615 - 1,248
Payments to
broker-dealers 92,938 492,609 103,950 - 67,015
Other 3,799 16,803 4,234 - 3,262
========================================================
Total 101,345 531,825 115,214 - 74,213
========================================================
MARYLAND MISSOURI NORTH TEXAS VIRGINIA
FUND FUND CAROLINA FUND FUND
FUND
($) ($) ($) ($) ($)
-------------------------------------------------------------------------------------
Advertising 3,247 4,981 7,229 1,463 4,199
Printing and mailing
prospectuses other
than to current
shareholders 833 1,184 1,809 485 1,246
Payments to
underwriters 1,885 2,595 3,674 431 2,221
Payments to
broker-dealers 108,233 137,535 240,447 27,907 137,823
Other 4,272 6,115 10,615 1,608 5,158
========================================================
Total 118,470 152,410 263,774 31,894 150,647
========================================================
</TABLE>
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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plans because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plans for administrative
servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Funds are
based on the standardized methods of computing performance mandated by the SEC.
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 for Class A and C
shares, 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
29, 2000, were:
SINCE
INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
--------------------------------------------------------------------------------
CLASS A
Alabama Fund 09/01/87 -8.02 3.71 5.66 6.34
Florida Fund 09/01/87 -7.65 4.01 5.98 6.73
Georgia Fund 09/01/87 -7.83 3.73 5.69 6.44
Kentucky Fund 10/12/91 -8.21 4.42 - 5.55
Louisiana Fund 09/01/87 -7.98 3.88 5.74 6.39
Maryland Fund 10/03/88 -7.97 4.08 5.86 6.06
Missouri Fund 09/01/87 -8.66 4.00 5.98 6.50
North Carolina Fund 09/01/87 -8.43 3.91 5.68 6.45
Texas Fund 09/01/87 -9.26 3.68 5.70 6.48
Virginia Fund 09/01/87 -8.40 3.82 5.83 6.49
SINCE
1 YEAR 3 YEARS INCEPTION
(%) (%) (%)
--------------------------------------------------------------------------------
CLASS B
Alabama Fund - - -
Florida Fund 02/01/00 - - -2.93
Georgia Fund - - -
Kentucky Fund - - -
Louisiana Fund - - -
Maryland Fund - - -
Missouri Fund - - -
North Carolina Fund - - -
Texas Fund - - -
Virginia Fund - - -
SINCE
1 YEAR 3 YEARS INCEPTION
(%) (%) (%)
--------------------------------------------------------------------------------
CLASS C
Alabama Fund 05/01/95 -6.33 1.65 3.76
Florida Fund 05/01/95 -5.99 2.48 4.16
Georgia Fund 05/01/95 -6.16 2.06 3.81
Kentucky Fund - - -
Louisiana Fund 05/01/95 -6.32 2.26 4.07
Maryland Fund 05/01/95 -6.24 2.32 4.26
Missouri Fund 05/01/95 -7.02 2.26 4.06
North Carolina Fund 05/01/95 -6.70 2.29 4.00
Texas Fund 05/01/95 -7.62 1.78 3.93
Virginia Fund 05/01/95 -6.67 2.15 3.94
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, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 29, 2000, were:
SINCE
INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
--------------------------------------------------------------------------------
CLASS A
Alabama Fund 09/01/87 -8.02 19.99 73.49 115.47
Florida Fund 09/01/87 -7.65 21.71 78.82 125.61
Georgia Fund 09/01/87 -7.83 20.09 73.92 118.10
Kentucky Fund 10/12/91 -8.21 24.17 - 57.26
Louisiana Fund 09/01/87 -7.98 20.49 74.74 116.97
Maryland Fund 10/03/88 -7.97 22.14 76.75 95.72
Missouri Fund 09/01/87 -8.66 21.65 78.70 119.65
North Carolina Fund 09/01/87 -8.43 21.11 73.68 118.31
Texas Fund 09/01/87 -9.26 19.80 74.07 119.10
Virginia Fund 09/01/87 -8.40 20.60 76.17 119.40
SINCE
1 YEAR (%) INCEPTION
(%)
--------------------------------------------------------------------------------
CLASS B
Alabama Fund - -
Florida Fund 02/01/00 - -2.93
Georgia Fund - -
Kentucky Fund - -
Louisiana Fund - -
Maryland Fund - -
Missouri Fund - -
North Carolina Fund - -
Texas Fund - -
Virginia Fund - -
SINCE
1 YEAR INCEPTION
(%) (%)
---------------------------------------------------------------------
CLASS C
Alabama Fund 05/01/95 -6.33 19.52
Florida Fund 05/01/95 -5.99 21.77
Georgia Fund 05/01/95 -6.16 19.81
Kentucky Fund - -
Louisiana Fund 05/01/95 -6.32 21.27
Maryland Fund 05/01/95 -6.24 22.36
Missouri Fund 05/01/95 -7.02 21.18
North Carolina Fund 05/01/95 -6.70 20.87
Texas Fund 05/01/95 -7.62 20.45
Virginia Fund 05/01/95 -6.67 20.55
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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
--------------------------------------------------------------------------------
Alabama Fund 5.29 - 4.95
Florida Fund 4.95 4.65 4.58
Georgia Fund 5.03 - 4.66
Kentucky Fund 5.34 - -
Louisiana Fund 5.24 - 4.91
Maryland Fund 5.08 - 4.72
Missouri Fund 5.09 - 4.70
North Carolina Fund 5.00 - 4.63
Texas Fund 5.34 - 4.96
Virginia Fund 5.02 - 4.65
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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
-------------------------------------------------------------------------------
Alabama Fund 9.22 - 8.63
Florida Fund 8.20 7.70 7.58
Georgia Fund 8.86 - 8.21
Kentucky Fund 9.40 - -
Louisiana Fund 9.23 - 8.65
Maryland Fund 9.13 - 8.48
Missouri Fund 8.96 - 8.28
North Carolina Fund 8.97 - 8.31
Texas Fund 8.84 - 8.21
Virginia Fund 8.82 - 8.17
As of February 29, 2000, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations were based were as follows:
COMBINED RATE (%)
-----------------------------------------
Alabama Fund 42.62
Florida Fund 39.60
Georgia Fund 43.22
Kentucky Fund 43.22
Louisiana Fund 43.22
Maryland Fund 44.35
Missouri Fund 43.22
North Carolina Fund 44.28
Texas Fund 39.60
Virginia Fund 43.07
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 that 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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
--------------------------------------------------------------------------------
Alabama Fund 5.46 - 5.07
Florida Fund 5.31 4.98 4.92
Georgia Fund 5.16 - 4.80
Kentucky Fund 5.32 - -
Louisiana Fund 5.34 - 4.94
Maryland Fund 5.06 - 4.65
Missouri Fund 5.21 - 4.83
North Carolina Fund 5.17 - 4.77
Texas Fund 5.40 - 4.94
Virginia Fund 5.16 - 4.79
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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
--------------------------------------------------------------------------------
Alabama Fund 9.52 - 8.84
Florida Fund 8.79 8.25 8.15
Georgia Fund 9.09 - 8.45
Kentucky Fund 9.37 - -
Louisiana Fund 9.41 - 8.70
Maryland Fund 9.09 - 8.36
Missouri Fund 9.18 - 8.51
North Carolina Fund 9.28 - 8.56
Texas Fund 8.94 - 8.18
Virginia Fund 9.06 - 8.41
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
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in a 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 Smith Barney 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 Smith Barney 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(R) companies, Salomon Smith Barney Inc., Merrill
Lynch, Lehman Brothers(R) and Bloomberg(R) 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.
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. 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 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 Franklin Templeton Investments, 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 approximately 3 million shareholder
accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and
an innovator in creating domestic equity funds, joined forces with Templeton, a
pioneer in international investing. The Mutual Series team, known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, Franklin Templeton Investments has over
$225 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. Franklin Templeton Investments
offers 105 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
$43 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 14,
1999.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 2000, 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 2000).
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.
DESCRIPTION OF RATINGS
------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 Although Florida does not impose a personal income tax, it does impose
an intangible personal property tax on intangible property having a taxable
situs in Florida. This tax is imposed on the value of certain intangible
personal property, including shares of a mutual fund. However, according to
Florida Statute Section 199.185, there is an exemption for shares of a mutual
fund, such as the Florida Fund, that is organized as a business trust, if, on
the January 1 assessment date, at least 90% of the net asset value of the
portfolio of assets corresponding to such shares consists of exempt property.
Exempt property includes notes, bonds and other obligations issued by the state
of Florida or its municipalities, counties and other taxing districts or by the
U.S. government and its agencies. If, on the date of assessment, the 90%
threshold is not met, only that portion, if any, of the value of the mutual fund
shares attributable to notes, bonds and obligations of the U.S. government and
its agencies will be exempt.
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 generally 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(g)(b) of Louisiana's individual income tax law,
interest earned on exempt obligations of the state of Louisiana or its political
subdivisions, is exempt from the Louisiana individual income tax interest earned
on obligations which Louisiana is prohibited from taxing by the constitutional
laws of the United States is also exempt under Section 47:293, distributions
from a regulated investment company, such as the Louisiana Fund, also will be
exempt from the Louisiana individual 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 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 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
[INSERT FRANKLIN TEMPLETON BEN HEAD]
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 2000 1-800/DIAL BEN(R)
P.O. BOX 997151, SACRAMENTO, CA 95899-9983
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, 2000, 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 29, 2000, 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 ............................................. 23
The Underwriter ............................................ 23
Performance ................................................ 26
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 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
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 investment
management and the 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
investment management and the 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, if
any, for resident shareholders of the Fund's state as is consistent with prudent
investment management and the preservation of shareholders' capital. This goal
is fundamental, which means that it 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 total
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 also normally invests at least and
the Puerto Rico Fund also normally invests at least 65% of its 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, as well as
qualifying municipal securities issued by U.S. territories such as Guam, Puerto
Rico, the Mariana Islands or the U.S. Virgin 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 shareholders 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 that 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 that
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
generally is 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 rise, it lowers a Fund's income when interest rates
fall. Of course, a Fund's income from its variable rate investments also may
increase if interest rates rise.
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 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, its yield 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 a Fund to protect itself from call risk is to buy bonds with call
protection. Call protection is an assurance that the bond will not be called for
a specific time period, typically five to 10 years from when the bond is issued.
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 AND DELAYED INTEREST 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 generally is more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, when interest rates rise, zero-coupon securities fall
more dramatically in value than bonds paying interest on a current basis. 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 SECURITIES 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 a Fund to the issuer and no interest accrues
to the Fund. If the other party to the transaction fails to deliver or pay for
the security, the Fund could miss a favorable price or yield opportunity, or
could experience a loss.
When a Fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and includes the value of the security in the
calculation of its net asset value. The Funds do not believe that their net
asset value or income will 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 generally will 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 the manager considers it advisable. When a Fund is
the buyer, it will set aside cash or liquid securities, with an aggregate value
equal to the amount of its purchase commitments, on its books 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 generally are 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 and Federal
Intermediate Funds, are diversified funds. The Connecticut and Federal
Intermediate 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 and Federal Intermediate 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 market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
each Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Unfavorable market or economic conditions may
include excessive volatility or a prolonged general decline in the securities
markets, the securities in which a Fund normally invests, or the economies of
the state and territories where each Fund invests.
Temporary defensive investments may include securities that pay taxable
interest, including (i) for the state Funds, municipal securities issued by a
state or local government other than the Fund's state; (ii) high quality
commercial paper; or (iii) securities issued by or guaranteed by the full faith
and credit of the U.S. government. Each Fund also may invest all of its assets
in municipal securities issued by a U.S. territory such as Guam, Puerto Rico,
the Mariana Islands or the U.S. Virgin Islands. The manager also may invest in
these types of securities or hold cash when securities meeting the Fund's
investment criteria are unavailable or to maintain liquidity.
PORTFOLIO TURNOVER 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. Short-term trading increases portfolio turnover
and may increase costs. However, 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 Ratings Group (S&P(R)), 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 different limitations on the
credit quality of the securities it may buy. These limitations generally are
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.
In addition to considering ratings in its selection of each Fund's portfolio
securities, the manager may consider, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. Securities that depend on the credit of
the U.S. government are regarded as having a triple A or equivalent rating.
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 Franklin Templeton Investments 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 trying to
maximize 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
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 the need for infrastructure improvements, increased costs for
education and other services, current debt levels, and the existence of
accumulated budget deficits.
The following gives more information about the risks of investing in the Funds.
Please read this information together with the section "What Are the Risks of
Investing in the Funds?" in the Prospectus.
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 reduced 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 1999 was at its lowest level since the early
1970s.
Arizona's economy has continued to diversify. While Arizona's economy, in the
past was heavily dependent on its farming, mining and real estate industries, as
of 1999, manufacturing accounted for approximately 9.8% of the state's total
employment, trade 23.7%, services 31.4%, government 16.1%, and construction
7.2%. Farming and mining accounted for less than 2% of the total workforce.
Arizona may be vulnerable, however, to events affecting high-technology products
and to 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. Results from fiscal 1999 show another operating surplus.
COLORADO. During the 1980s, Colorado's economy was dependent on its energy
sector. As a result, when the energy sector declined in the mid-to-late 1980s,
the state suffered a sharp economic downturn. 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 three 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 eight 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, a large, unfunded pension liability, and a relatively
high debt burden.
NEW JERSEY. Historically, New Jersey's economy, which greatly benefits from the
substantial employment opportunities in New York and Pennsylvania, 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. In recent years, however,
the state's performance has improved. Jobs grew at a rate of 2.3% in 1997, 2% in
1998 and 1.7% in 1999. While these rates were below the national rates of 2.5%
in 1997, 2.6% in 1998 and 2.1% in 1999, they led the region. Unemployment levels
also have decreased to 4.4% in 1999 from a high of 8.5% in 1992 and are slightly
above the national rate of 4.2%.
The state ended fiscal 1999 with a surplus and increased its fund balances to
$1.3 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. New Jersey's per capita income levels rank the state
second in the nation and is 128.5% of the nation's average. 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 May
2000, 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. 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 50%. 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 behind 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 September 1998 to September 1999, compared to a national rate of
2.5%. Unemployment levels have been improving, yet are still higher than the
national rate. Population and personal income growth also have remained below
national levels. However, on a per capita income basis Pennsylvania is above the
national average and ranks 16th among all states.
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 has posted 8
years of budgetary surplus operations with the past five years showing revenues
well in excess of projections. Due to the cyclical nature of its economy and
financial performance, the commonwealth has been committed to using a portion of
its surpluses to build reserves in the hope of providing some security against
future economic downturns or other uncertainties that could affect the state.
Currently these reserves are approximately 5% of revenues and are projected to
be $1 billion at the end of fiscal 2000. Other surplus money is being used to
provide tax relief.
U.S. TERRITORIES Since each Fund may invest up to 35% 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 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 invest. 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.
PUERTO RICO. In recent years, Puerto Rico's financial performance has improved.
Overall, as of March 2000, Moody's considered Puerto Rico's outlook to be
positive. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1999 (audited) of $497
million, including an unreserved balance of $185.4 million. Between fiscal years
1993 and 1999, Puerto Rico has experienced a 4.3% drop in the unemployment rate,
a 54% increase in hotel registrations, a 31% in retail sales, a 76% increase in
exports, and a 22% decrease in welfare recipients.
While Puerto Rico's debt per capita levels are at the higher end of the spectrum
compared to American states that is partly explained by the fact that Puerto
Rico generally centralizes its debt issuance at the state level. S&P rates
Puerto Rico's general obligation debt at A, with a stable outlook. Moody's rates
the island's general obligation debt at Baa1. The Moody's rating has been at
Baa1 since 1976 and the S&P A-rating has been in place since 1956. Going
forward, these debt 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.
Puerto Rico also faces challenges from 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 are being 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. In the fifth year of this phase-out period, business continues to
show interest in Puerto Rico as manufacturing and services/commerce continue to
represent the largest sector of employment.
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.
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 18, 2000, 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 U.S. territory 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 emigrated 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 $2.575 billion in 1997. By sector, the breakdown was
garment manufacturing 33%, tourism 23%, retail trade 18%, services 17% and other
9%. Gross business revenue tax collections totaled $68.6 million in fiscal year
1998. Also in fiscal year 1998, general fund revenues totaled $234 million while
expenditures totaled $238 million.
The population of all the islands combined was 67,212 at fiscal year end 1996
and average earnings per capita totaled $9,702. At fiscal year end 1995, the
most recent year available, unemployment among eligible labor force participants
stood at 2.3%.
U.S. VIRGIN ISLANDS. The U.S. Virgin Islands has suffered numerous years of
budget imbalances. Since fiscal 1989, the Virgin Islands has incurred budget
deficits in all but four fiscal years. As of June 30, 1999, the accumulated
deficit was close to $341 million. To help finance this deficit, the government
issued a $300 million bond, which allowed it to meet a $13 million payroll
payment and to begin to pay off the backlog of payments to vendors. The Virgin
Islands' large public sector payroll (approximately 32.8% of employment),
relatively small private sector that is dependent on tourism and related
services (21% of employment), and heavy reliance on taxes as a revenue source
(close to 97% of all revenues), together with the effects of three major
hurricanes in the past ten years, have contributed to its financial problems.
The U.S. Virgin Islands are not experiencing the record economic boom that the
mainland is. In 1999, employment decreased 1.7% following two years of minimal
growth. The unemployment rate for 1999 was 4.8%, which is the lowest level since
1993. The Virgin Islands are highly dependent on tourism, which contracted in
1999. While the islands have experienced an increase in hotel occupancy, the
majority of visitors come via cruise ships. The number of cruise ship passengers
decreased 12% in 1999, which resulted in an overall decline of 8% for the year.
A significant reason for the decrease in cruise ships was due to the damage
suffered to the docks from recent hurricanes. After Hurricane Jose in October
1999, only 39 ships were able to dock in October compared to 65 in October 1998.
In September 1998, the Department of Interior Office of Inspector General issued
an audit report on the Virgin Islands. It noted that while the Virgin Islands
had made improvements in its financial situation, problems remained in the areas
of overall financial management, expenditure control and revenue collections. To
help improve its financial position, the Virgin Islands has developed a
five-year economic recovery plan. Central to this plan is a reduction in
government spending. In June 1999, the governor implemented a strict hiring
freeze and mandated a 5% reduction in personnel expenditures each year through
fiscal 2004, a 50% reduction in overtime expenses, and various other cost saving
initiatives. In October, the government and the Department of Interior entered
into a Memorandum of Understanding stipulating that federal grants will be
awarded contingent on several financial performance and accountability standards
being met that will demonstrate improvement in the economic and financial
condition of the islands. Since the plan is new, it is not yet certain whether
or to what extent the plan will be successful in helping the Virgin Islands
improve its financial condition.
OFFICERS AND TRUSTEES
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 (79)
1045 Sansome Street, San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (68)
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 Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Chairman of the Board, General Host Corporation
(nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in Franklin Templeton
Investments.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the investment
companies in Franklin Templeton Investments; and FORMERLY, 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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
Chairman of the Board and Trustee
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Investment Advisory Services, Inc.; Chairman of the Board, Franklin
Advisers, Inc.; Vice President, 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 Franklin Templeton Investments.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
President and Trustee
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc., Franklin Investment Advisory Services,
Inc. and Franklin/Templeton Investor Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 Franklin Templeton Investments.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
Trustee
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Recycling (redevelopment); director or trustee, as
the case may be, of 28 of the investment companies in Franklin Templeton
Investments; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
Trustee
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 48 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Sheila Amoroso (40)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin 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 Franklin Templeton
Investments.
Rafael R. Costas, Jr. (35)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Chief Financial Officer
President, Member - Office of the President, Chief Financial Officer and Chief
Operating Officer, Franklin Resources, Inc.; Senior Vice President, Chief
Financial Officer and Director, Franklin/Templeton Investor Services, Inc.;
Senior Vice President and Chief Financial Officer, 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.; 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 Franklin
Templeton Investments.
Deborah R. Gatzek (51)
1810 Gateway Drive, San Mateo, CA 94404
Secretary
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the investment
companies in Franklin Templeton Investments; and FORMERLY, 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, and Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services, Inc.
(until January 2000).
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Counsel, Franklin Resources, Inc; President, Chief Executive Officer and
Director, Franklin Select Realty Trust, Property Resources, Inc., Property
Resources Equity Trust, Franklin Real Estate Management, Inc. and Franklin
Properties, Inc.; officer and director of some of the other subsidiaries of
Franklin Resources, Inc.; officer of 53 of the investment companies in Franklin
Templeton Investments; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of some of the other subsidiaries of Franklin Resources, Inc. and of 53
of the investment companies in Franklin Templeton Investments; and FORMERLY,
Deputy Director, Division of Investment Management, Executive Assistant and
Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and
Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995), Attorney,
Rogers & Wells (until 1986), and Judicial Clerk, U.S. District Court (District
of Massachusetts) (until 1979).
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the other subsidiaries of Franklin Resources, Inc. and of 29 of the
investment companies in Franklin Templeton Investments.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer
of 53 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
Thomas Walsh (38)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
*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 Franklin Templeton Investments receive a flat fee of $2,000
per committee meeting attended, a portion of which is allocated to the Trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in Franklin Templeton Investments and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the Trust are subject to reductions resulting from fee caps
limiting the amount of fees payable to board members who serve on other boards
within Franklin Templeton Investments. The following table provides the total
fees paid to noninterested board members by the Trust and by Franklin Templeton
Investments.
TOTAL FEES NUMBER OF BOARDS
TOTAL FEES RECEIVED FROM IN FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON TEMPLETON
NAME TRUST1 ($) INVESTMENTS2 ($) INVESTMENTS ON
WHICH EACH SERVES3
--------------------------------------------------------------------------------
Frank H. Abbott, III 22,999 156,060 28
Harris J. Ashton 25,239 363,165 48
S. Joseph Fortunato 23,511 363,238 50
Edith E. Holiday 31,700 237,265 25
Frank W.T. LaHaye 22,999 156,060 28
Gordon S. Macklin 25,239 363,165 48
1. For the fiscal year ended February 29, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in Franklin Templeton Investments. This number does not include the total number
of series or funds within each investment company for which the board members
are responsible. Franklin Templeton Investments currently includes 52 registered
investment companies, with approximately 157 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 Franklin Templeton
Investments for which they serve as director or trustee. No officer or board
member received any other compensation, including pension or retirement
benefits, directly or indirectly from the Funds or other funds in Franklin
Templeton Investments. 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 Franklin Templeton Investments, 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
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.
The Funds, their manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for a Fund or that are currently held by the Funds, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the Funds, their manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
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 $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a Fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended February 29, 2000, and February 28, 1999
and 1998, the Funds paid the following management fees:
MANAGEMENT FEES PAID ($)
------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Arizona Fund 4,051,080 4,124,084 3,799,811
Colorado Fund 1,628,892 1,615,981 1,432,605
Connecticut Fund 1,410,653 1,313,337 1,126,660
Federal Intermediate Fund1 1,011,967 901,601 628,115
High Yield Fund 28,491,742 29,382,074 24,164,691
New Jersey Fund 3,470,377 3,411,855 3,074,915
Oregon Fund 2,502,386 2,429,095 2,119,137
Pennsylvania Fund 3,602,657 3,734,742 3,414,301
Puerto Rico Fund 1,209,819 1,223,542 1,137,320
1. For the fiscal years ended February 29, 2000, February 28, 1999 and 1998,
management fees before any advance waiver totaled $1,046,931, $959,067, and
$718,091, 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 each Fund's average daily net assets over $200 million up to $700
million;
o 0.10% of each Fund's average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of each Fund's average daily net assets over $1.2 billion.
During the last three fiscal years ended February 29, 2000, and February 28,
1999 and 1998, the manager paid FT Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Arizona Fund 1,123,413 1,132,869 1,060,456
Colorado Fund 445,392 436,830 383,050
Connecticut Fund 380,856 347,940 298,352
Federal Intermediate Fund 276,840 246,943 176,069
High Yield Fund 5,311,059 5,411,515 4,519,848
New Jersey Fund 990,633 970,458 872,308
Oregon Fund 708,290 679,370 587,736
Pennsylvania Fund 1,023,651 1,046,296 971,653
Puerto Rico Fund 323,935 325,819 301,686
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 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 SEC.
PORTFOLIO TRANSACTIONS
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 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 Franklin Templeton Investments, 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 29, 2000, and February 28, 1999 and 1998,
the Funds did not pay any brokerage commissions.
As of February 29, 2000, 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.
Distributions are subject to approval by the board. 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 (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 will be exempt from that state's personal income tax. 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 from many sources, including on any temporary
investments, the discount from stripped obligations or their coupons, income
from securities loans or other taxable transactions, or ordinary income derived
from the sale of market discount bonds. Any distributions by a Fund from such
income will be taxable to you as ordinary income, whether you 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, to reduce or eliminate excise or income taxes on the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from the Fund's sale of securities held for more than
five years may be subject to a reduced tax rate.
Information on the tax character of distributions The Funds will inform you of
the amount of your ordinary income dividends and capital gain 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 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 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 distributions in December
(or to pay them in January, in which case you must treat them as received in
December) but can give no assurances that its distributions will be sufficient
to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and ,generally,
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 any 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.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gains from the sale of Fund shares held for more than five years may be subject
to a reduced tax rate.
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 any 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 is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received deduction.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while exempt from regular federal income tax, is a preference item for
taxpayers when determining their alternative minimum tax under the Code and
under the income tax provisions of several states. Private activity bond
interest could subject you to or increase your liability under federal and state
alternative minimum taxes, depending on your individual or corporate tax
position. Persons who are defined in the Code as substantial users (or persons
related to such users) of facilities financed by private activity bonds should
consult with their tax advisors before buying 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 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 each 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 Arizona, High Yield, New Jersey and Pennsylvania Funds currently offer three
classes of shares, Class A, Class B and Class C. The Arizona, New Jersey and
Pennsylvania Funds began offering Class B shares on February 1, 2000. The
Colorado, Connecticut, Oregon and Puerto Rico Funds currently offer two classes
of shares, Class A and Class C. The full title of each class is:
o Franklin Arizona Tax-Free Income Fund - Class A o Franklin Arizona Tax-Free
Income Fund - Class B 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 B 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 B 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 only offers one share class. Because its sales charge
structure and Rule 12b-1 plan is similar to those of Class A shares, shares of
this 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 a 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 June 2, 2000, 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 Franklin Templeton
Investments.
BUYING AND SELLING SHARES
Each Fund continuously offers their 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 a Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of a 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. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
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 Franklin Templeton funds to take advantage of the
lower sales charges for large purchases. Franklin Templeton funds include the
U.S. registered mutual funds in Franklin Templeton Investments, except Franklin
Templeton Variable Insurance Products Trust and Templeton Capital Accumulator
Fund, Inc.
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 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 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 Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust. 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 investing 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 may accept orders for these accounts 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 Franklin Templeton
Investments 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 Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales of
Fund shares and/or total assets with Franklin Templeton Investments. 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 Franklin
Templeton Investments; 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 Franklin Templeton Investments. 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 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, 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 generally are 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.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. The Funds may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the Funds receive 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. The Funds do not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH 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.
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with a Fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
Fund at a later date. These sub-accounts may be registered either by name or
number. Each Fund's investment minimums apply to each sub-account. Each Fund
will send confirmation and account statements for the sub-accounts to the
institution.
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 29, 2000
and February 28, 1999 and 1998:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
--------------------------------------------------------------------------------
2000
Arizona Fund 1,789,429 116,636 43,769
Colorado Fund 792,171 47,662 26,569
Connecticut Fund 775,626 44,859 27,906
Federal Intermediate Fund 295,096 37,026 34,398
High Yield Fund 12,907,406 797,311 800,953
New Jersey Fund 1,875,772 113,850 68,849
Oregon Fund 1,361,936 80,741 63,487
Pennsylvania Fund 1,641,659 99,014 42,266
Puerto Rico Fund 506,727 32,887 6,957
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
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
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
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 The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its shareholders.
The plans are expected to, among other things, increase advertising of the Fund,
encourage sales of the Fund and service to its shareholders, and increase or
maintain assets of the Fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the Fund is useful in managing the Fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates who provide service or account maintenance to shareholders (service
fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." 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. The Fund may pay up to 0.10% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows the Fund
to reimburse Distributors for eligible expenses that Distributors has shown it
has incurred. The Fund will not reimburse more than the maximum amount allowed
under the plan. Any unreimbursed expenses from one year may not be carried over
to or reimbursed in later years.
For the fiscal year ended February 29, 2000, the amounts paid by the Funds
pursuant to the Class A plan were:
FEDERAL
ARIZONA COLORADO ($) CONNECTICUT INTERMEDIATE
($) ($) ($)
--------------------------------------------------------------------------------
Advertising 53,801 22,498 12,074 13,605
Printing and mailing
prospectuses other
than to current
shareholders 23,029 8,154 7,473 2,352
shareholders
Payments to 18,207 5,185 5,506 5,434
underwriters
Payments to
broker-dealers 609,944 223,330 181,203 155,745
Other 71,385 21,951 22,287 10,800
-------------------------------------------------------
Total 776,366 281,118 228,543 187,936
-------------------------------------------------------
HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA
($) ($) ($) (S)
--------------------------------------------------------------------------------
Advertising 209,327 43,033 28,818 55,567
Printing and mailing 75,545 17,867 14,106 20,209
prospectuses other
than to current
shareholders
Payments to 56,653 14,946 10,205 11,042
underwriters
Payments to 4,540,156 500,442 353,642 537,667
broker-dealers
Other 229,585 58,667 41,100 56,242
-------------------------------------------------------
Total 5,111,266 634,955 447,871 680,727
-------------------------------------------------------
PUERTO RICO
($)
---------------------------------------
Advertising 10,689
Printing and mailing
prospectuses
other than to current
shareholders 9,250
Payments to underwriters
3,470
Payments to broker
dealers 157,294
Other 18,935
--------------
Total 199,638
--------------
THE CLASS B AND C PLANS. Each Fund pays Distributors up to 0.65% per year of the
class's average daily net assets, out of which 0.15% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for advancing
commissions to securities dealers with respect to the initial sale of Class B
and C shares. Class B plan fees payable to Distributors are used by Distributors
to pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
The Class B and C plans are compensation plans. They allow each Fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors has
incurred at the time of the payment. Distributors must, however, demonstrate to
the board that it has spent or has immediate plans to spend the amount received
on eligible expenses. Each Fund will not pay more than the maximum amount
allowed under the plans.
For the fiscal year ended February 29, 2000, the amounts paid by the Funds
pursuant to the Class B plan were:
HIGH YIELD
($)
-----------------------------------------------------
Advertising 6,710
Printing and mailing prospectuses
other than to current shareholders 431
Payments to underwriters 5,263
Payments to broker-dealers 358,394
Other 7,303
----------------
Total 378,101
----------------
For the fiscal year ended February 29, 2000, the amounts paid by the Funds
pursuant to the Class C plan were:
FEDERAL
ARIZONA ($) COLORADO CONNECTICUT INTERMEDIATE
($) ($) ($)
--------------------------------------------------------------------------------
Advertising 3,765 6,390 5,048 -
Printing and mailing 874 1,280 1,544 -
prospectuses other than
to current
shareholders
Payments to underwriters 1,804 2,641 3,414 -
Payments to 141,366 124,992 149,052 -
broker-dealers
Other 12,148 6,087 8,474 -
-------------------------------------------------------
Total 159,957 141,390 167,532 -
-------------------------------------------------------
HIGH YIELD NEW JERSEY OREGON PENNSYLVANIA
($) ($) ($) ($)
--------------------------------------------------------------------------------
Advertising 108,376 8,395 6,562 8,207
Printing and mailing 28,696 2,601 1,535 1,952
prospectuses other than
to current
shareholders
Payments to underwriters 39,613 4,727 3,840 3,930
Payments to 3,750,509 298,654 209,041 259,927
broker-dealers
Other 114,386 13,041 8,771 12,073
-------------------------------------------------------
Total 4,041,580 327,958 229,749 286,089
-------------------------------------------------------
PUERTO RICO
($)
--------------------------------------------------------
Advertising 1,813
Printing and mailing 449
prospectuses other than to
current shareholders
Payments to underwriters 846
Payments to broker-dealers 45,319
Other 2,306
-----------------
Total 50,733
-----------------
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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plans because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plans for administrative
servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Funds are
based on the standardized methods of computing performance mandated by the SEC.
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 for Class A and C
shares, 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
29, 2000, were:
SINCE
INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
--------------------------------------------------------------------------------
CLASS A
Arizona Fund 9/01/87 -8.26 3.76 5.73 6.29
Colorado Fund 9/01/87 -8.59 3.97 5.93 6.53
Connecticut Fund 10/03/88 -9.89 3.54 5.19 5.52
Federal Intermediate 9/21/92 -4.63 4.60 - 5.29
Fund
High Yield Fund 3/18/86 -7.89 4.81 6.50 7.16
New Jersey Fund 5/12/88 -7.19 4.09 5.86 6.50
Oregon Fund 9/01/87 -7.89 3.77 5.59 6.03
Pennsylvania Fund 12/01/86 -8.34 3.87 5.87 5.89
Puerto Rico Fund 4/03/85 -7.06 4.26 5.87 6.80
SINCE
1 YEAR INCEPTION
(%) (%)
-------------------------------------------------
CLASS B
Arizona Fund - -2.79
High Yield Fund -7.90 -6.05
New Jersey Fun - -2.56
Pennsylvania Fund - -2.73
SINCE
1 YEAR INCEPTION
(%) (%)
-------------------------------------------------
CLASS C
Arizona Fund -6.54 3.83
Colorado Fund -6.90 4.09
Connecticut Fund -8.10 3.63
High Yield Fund -6.29 4.83
New Jersey Fund -5.55 4.22
Oregon Fund -6.22 3.91
Pennsylvania Fund -6.64 3.98
Puerto Rico Fund -5.25 4.33
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, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 29, 2000 were:
SINCE
INCEPTION 1 YEAR 5 YEARS (%) 10 YEARS INCEPTION
DATE (%) (%) (%)
--------------------------------------------------------------------------------
CLASS A
Arizona Fund 9/01/87 -8.26 20.24 74.58 114.21
Colorado Fund 9/01/87 -8.59 21.50 77.84 120.37
Connecticut Fund 10/03/88 -9.89 18.97 65.90 84.71
Federal
Intermediate Fund
9/21/92 -4.63 25.24 - 46.71
High Yield Fund 3/18/86 -7.89 26.51 87.65 162.38
New Jersey Fund 5/12/88 -7.19 22.20 76.72 110.35
Oregon Fund 9/01/87 -7.89 20.30 72.33 107.95
Pennsylvania Fund 12/01/86 -8.34 20.90 76.91 113.56
Puerto Rico Fund 4/03/85 -7.06 23.17 76.93 166.60
SINCE
1 YEAR INCEPTION
(%) (%)
---------------------------------------------
CLASS B
Arizona Fund - -2.79
High Yield Fund -7.90 -6.99
New Jersey Fund - -2.56
Pennsylvania Fund - -2.73
SINCE
1 YEAR INCEPTION
(%) (%)
---------------------------------------------
CLASS C
Arizona Fund -6.54 19.94
Colorado Fund -6.90 21.36
Connecticut Fund -8.10 18.81
High Yield Fund -6.29 25.61
New Jersey Fund -5.55 22.10
Oregon Fund -6.22 20.35
Pennsylvania Fund -6.64 20.75
Puerto Rico Fund -5.25 22.74
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 29, 2000, were:
CLASS A (%) CLASS B CLASS C
(%) (%)
--------------------------------------------------------------------
Arizona Fund 5.13 4.86 4.76
Colorado Fund 5.06 - 4.68
Connecticut Fund 4.95 - 4.58
Federal Intermediate Fund 4.80 - -
High Yield Fund 5.86 5.56 5.52
New Jersey Fund 5.08 4.88 4.71
Oregon Fund 4.99 - 4.61
Pennsylvania Fund 5.15 4.85 4.78
Puerto Rico Fund 4.86 - 4.48
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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
-----------------------------------------------------------------
Arizona Fund 8.94 8.47 8.30
Colorado Fund 8.80 - 8.13
Connecticut Fund 8.58 - 7.94
Federal Intermediate Fund 7.95 - -
High Yield Fund 9.70 9.21 9.14
New Jersey Fund 8.98 8.63 8.33
Oregon Fund 9.08 - 8.39
Pennsylvania Fund 8.77 8.26 8.14
Puerto Rico Fund 8.05 - 7.42
As of February 29, 2000, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations were based were as follows:
COMBINED RATE
(%)
-----------------------------------------------
Arizona Fund 42.64
Colorado Fund 42.47
Connecticut Fund 42.32
Federal Intermediate Fund 39.60
High Yield Fund 39.60
New Jersey Fund 43.45
Oregon Fund 45.04
Pennsylvania Fund 41.29
Puerto Rico Fund 39.60
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 that 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 29, 2000, were:
Class A Class B Class C
(%) (%) (%)
--------------------------------------------------------------
Arizona Fund 5.31 4.99 4.92
Colorado Fund 5.22 - 4.85
Connecticut Fund 5.29 - 4.92
Federal Intermediate 4.80 - -
Fund
High Yield Fund 5.96 5.67 5.58
New Jersey Fund 5.23 4.90 4.85
Oregon Fund 5.14 - 4.76
Pennsylvania Fund 5.30 4.98 4.91
Puerto Rico Fund 5.09 - 4.74
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 29, 2000, were:
CLASS A CLASS B CLASS C
(%) (%) (%)
--------------------------------------------------------------------
Arizona Fund 9.26 8.70 8.58
Colorado Fund 9.07 - 8.43
Connecticut Fund 9.17 - 8.53
Federal Intermediate Fund 7.95 - -
High Yield Fund 9.87 9.39 9.24
New Jersey Fund 9.25 8.66 8.58
Oregon Fund 9.35 - 8.66
Pennsylvania Fund 9.03 8.48 8.36
Puerto Rico Fund 8.43 - 7.85
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
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in a 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 Smith Barney 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 Smith Barney 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(R) companies, Salomon Smith Barney Inc., Merrill
Lynch, Lehman Brothers(R) and Bloomberg(R) 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.
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. 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 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 Franklin Templeton Investments, 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 approximately 3 million shareholder
accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and
an innovator in creating domestic equity funds, joined forces with Templeton, a
pioneer in international investing. The Mutual Series team, known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, Franklin Templeton Investments has over
$225 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. Franklin Templeton Investments
offers 105 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
$43 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 14,
1999.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 2000, 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 2000).
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.
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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
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 As a result of Section 43-1021(4) of the Arizona Income Tax Code,
interest on obligations of the state of Arizona or its political subdivisions is
exempt from the Arizona individual income tax. Section 43-1022(6) provides
similar tax-exempt treatment for interest on obligations of the U.S. Pursuant to
Arizona Individual Income Tax Ruling 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,
such as 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 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.
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.
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FRANKLIN TAX-FREE TRUST
FILE NOS. 02-94222
& 811-4149
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
The following exhibits are incorporated by reference to the previously
filed document indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Restated Agreement and Declaration of Trust dated October 26,
1984
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Certificate of Amendment of Agreement and Declaration of Trust
dated July 16, 1991
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii) Certificate of Amendment of Agreement and Declaration of Trust
dated April 21, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of Agreement and Declaration of Trust
dated December 14, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Certificate of Amendment of Agreement and Declaration of Trust
dated March 21, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(vi) Certificate of Secretary Amendment of Agreement and
Declaration of Trust dated August 31, 1999
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: January 28, 2000
(b) By-laws
(i) By-Laws
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Certificate of Amendment of By-Laws dated December 8, 1987
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii)Amendment to By-Laws dated April 21, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of By-Laws dated December 14, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Amendment to By-Laws dated January 18, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between Registrant and Franklin Advisers,
Inc. dated December 1, 1986
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Management Agreement between Registrant and
Franklin Advisers, Inc. dated August 1, 1995
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(iii) Management Agreement between Registrant and Franklin Advisers
on behalf of Franklin Connecticut Tax-Free Income Fund dated
October 1, 1998
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: January 28, 2000
(e) Underwriting Contracts
(i) Amended and Restated Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc. dated March 29, 1995
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(ii) Form of Dealer Agreements effective as of March 1, 1998
between Franklin/Templeton Distributors, Inc. and Securities
Dealers
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: December 23, 1998
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1998
(iv) Amendment dated February 27, 1998 to Master Custody Agreement
between Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: December 23, 1998
(v) Foreign Custody Manager Agreement made as of July 30, 1998,
effective as of February 27, 1998 on behalf of each Investment
Company listed on Schedule 1
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: December 23, 1998
(vi) Amendment dated March 21, 2000, to Exhibit A of the Master
Custody Agreement between Registrant and the Bank of New York
dated February 16, 1996
(h) Other Material Contracts
(i) Agreement between Registrant and Financial Guaranty Insurance
Company dated March 8, 1985
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Agreement between Registrant and Financial
Guaranty Insurance Company dated November 24, 1992
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12
to Registration Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(iii) Mutual Fund Agreement between Registrant and Financial
Guaranty Insurance Company dated April 30, 1993
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1998
(iv) Subcontract for Fund Administrative Services dated October 1,
1996 and Amendment thereto dated March 11, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services Inc.
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1998
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated April 17, 1998
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding dated September 21, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(m) Rule 12b-1 Plan
(i) Class A shares Distribution Plans pursuant to Rule 12b-1 on
behalf of the following funds:
Dated July 1, 1993:
Franklin Arizona Insured Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Dated May 1, 1994:
Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Class C shares Distribution Plan pursuant to Rule 12b-1 on
behalf of the following funds:
Dated March 30, 1995:
Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(iii) Distribution Plan dated October 16, 1998 pursuant to Rule
12b-1 between the Registrant on behalf of Franklin High Yield
Tax-Free Income Fund - Class B and Franklin/Templeton
Distributors, Inc.
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: December 23, 1998
(iv) Class B Distribution Plan pursuant to Rule 12b-1 on behalf of
the following funds:
Franklin Arizona Tax-Free Income Fund - Class B
Franklin Florida Tax-Free Income Fund - Class B
Franklin Insured Tax-Free Income Fund - Class B
Franklin Michigan Insured Tax-Free Income Fund - Class B
Franklin New Jersey Tax-Free Income Fund - Class B
Franklin Ohio Insured Tax-Free Income Fund - Class B
Franklin Pennsylvania Tax-Free Income Fund - Class B
(o) Rule 18f-3 Plan
(i) Multiple Class Plan dated October 19, 1995
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1998
(ii) Multiple Class Plan dated March 19, 1998 on behalf of Franklin
High Yield Tax-Free Income Fund
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 29, 1999
(iii) Multiple Class Plan on behalf of Franklin Arizona Tax-Free
Income Fund
(iv) Multiple Class Plan on behalf of Franklin Florida Tax-Free
Income Fund
(v) Multiple Class Plan on behalf of Franklin Insured Tax-Free
Income Fund
(vi) Multiple Class Plan on behalf of Franklin Michigan Insured
Tax-Free Income Fund
(vii) Multiple Class Plan on behalf of Franklin New Jersey Tax-Free
Income Fund
(viii) Multiple Class Plan on behalf of Franklin Ohio Insured
Tax-Free Income Fund
(ix) Multiple Class Plan on behalf of Franklin Pennsylvania
Tax-Free Income Fund
(p) Power of Attorney
(i) Power of Attorney dated January 20, 2000
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: January 28, 2000
(ii) Certificate of Secretary dated January 27, 2000
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: January 28, 2000
(q) Code of Ethics
(i) Code of Ethics
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a Court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and trustees of the Registrant's managers also serve as officers
and/or trustees for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group
of Funds. In addition Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager, Franklin
Advisers, Inc. (SEC File 801-26292), incorporated herein by reference, which
sets forth the officers and trustees of the investment manager and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and trustees during the past
two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund Inc.
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Registrant or
its shareholder services agent, Franklin/Templeton Investors Services, Inc.,
both of whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 28th day of June, 2000.
FRANKLIN TAX-FREE TRUST
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Amendment has been signed below by the following persons in the capacities
and on the dates indicated:
RUPERT H. JOHNSON, JR.* Trustee and Principal
Rupert H. Johnson, Jr. Executive Officer
Dated: June 28, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: June 28, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: June 28, 2000
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: June 28, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: June 28, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: June 28, 2000
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: June 28, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: June 28, 2000
FRANK W. T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: June 28, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: June 28, 2000
*By /S/ DAVID P. GOSS
David P. Goss, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN TAX-FREE TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.a(i) Restated Agreement and Declaration of *
Trust dated October 26, 1984
EX-99.a(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated July 16, 1991
EX-99.a(iii) Certificate of Amendment of Agreement and *
Declaration of Trust dated April 21, 1992
EX-99.a(iv) Certificate of Amendment of Agreement and *
Declaration of Trust dated December 14,
1993
EX-99.a(v) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 21, 1995
EX-99.a(vi) Certificate of Secretary Amendment of *
Agreement and Declaration of Trust dated
August 31, 1999
EX-99.b(i) By-Laws *
EX-99.b(ii) Certificate of Amendment of By-Laws dated *
December 8,1987
EX-99.b(iii) Amendment to By-Laws dated April 21, 1992 *
EX.99.b(iv) Certificate of Amendment of By-Laws dated *
December 14, 1993
EX-99.b(v) Amendment to By-Laws dated January 18, *
1994
EX-99.d(i) Management Agreement between Registrant *
and Franklin Advisers, Inc. dated
December 1, 1986
EX-99.d(ii) Amendment to Management Agreement between *
Registrant and Franklin Advisers, Inc.
dated August 1, 1995
EX-99.d(iii) Management Agreement between Registrant *
and Franklin Advisers on behalf of
Franklin Connecticut Tax-Free Income Fund
dated October 1, 1998
EX-99.e(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.
dated March 29, 1995
EX-99.e(ii) Dealer Agreements Effective as of March *
1, 1998 between Franklin/Templeton
Distributors, Inc. and securities dealers
EX-99.g(i) Master Custody Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.g(ii) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.g(iii) Amendment dated May 7, 1997 to Master *
Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
EX-99.g(iv) Amendment dated February 27, 1998 to *
Master Custody Agreement between
Registrant and Bank of New York dated
February 16, 1996
EX-99.g(v) Foreign Custody Manager Agreement made as *
of July 30, 1998, effective as of
February 27, 1998 on behalf of each
Investment Company listed on Schedule 1
EX-99.g(vi) Amendment dated March 21, 2000, to Attached
Exhibit A of the Master Custody Agreement
between Registrant and the Bank of New
York dated February 16, 1996
EX-99.h(i) Agreement between Registrant and *
Financial Guaranty Insurance Company
dated March 8, 1985
EX-99.h(ii) Amendment to Agreement between *
Registrant and Financial Guaranty
Insurance Company dated November 24, 1992
EX-99.h(iii) Mutual Fund Agreement between Registrant *
and Financial Guaranty Insurance Company
dated April 30, 1993
EX-99.h(iv) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated March 11, 1998
between Franklin Advisers, Inc. and
Franklin Templeton Services Inc.
EX-99.i(i) Opinion and Consent of Counsel dated *
April 17, 1998
EX-99.j(i) Consent of Independent Auditors Attached
EX-99.l(i) Letter of Understanding dated *
September 21, 1992
EX-99.l(ii) Letter of Understanding dated April 12, *
1994
EX-99.m(i) Class A Shares Distribution Plans *
pursuant to Rule 12b-1 dated July 1, 1993
and May 1, 1994
EX-99.m(ii) Class C Shares Distribution Plan pursuant *
to Rule 12b-1 dated March 30, 1995
EX-99.m(iii) Distribution Plan dated October 16, 1998 *
pursuant to Rule 12b-1 between the
Registrant on behalf of Franklin High
Yield Tax-Free Income Fund - Class B and
Franklin/Templeton Distributors, Inc.
EX-99.m(iv) Class B Distribution Plan pursuant to Attached
Rule 12b-1
EX-99.o(i) Multiple Class Plan dated October 19, 1995 *
EX-99.o(ii) Multiple Class Plan on behalf of Franklin *
High Yield Tax-Free Income Fund
EX-99.o(iii) Multiple Class Plan on behalf of Franklin Attached
Arizona Tax-Free Income Fund
EX-99.o(iv) Multiple Class Plan on behalf of Franklin Attached
Florida Tax-Free Income Fund
EX-99.o(v) *Multiple Class Plan on behalf of Attached
Franklin Insured Tax-Free Income Fund
EX-99.o(vi) Multiple Class Plan on behalf of Franklin Attached
Michigan Insured Tax-Free Income Fund
EX-99.o(vii) Multiple Class Plan on behalf of Franklin Attached
New Jersey Tax-Free Income Fund
EX-99.o(viii) Multiple Class Plan on behalf of Franklin Attached
Ohio Insured Tax-Free Income Fund
EX-99.o(ix) Multiple Class Plan on behalf of Franklin Attached
Pennsylvania Tax-Free Income Fund
EX-99.p(i) Power of Attorney dated January 20, 2000 *
EX-99.p(ii) Certificate of Secretary dated January *
27, 2000
EX-99.q(i) Code of Ethics Attached
*Incorporated by Reference
