Franklin
California High Yield
Municipal Fund
Franklin Municipal Securities Trust
PROSPECTUS October 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin California High Yield Municipal Fund (the "Fund"), a separate
non-diversified series of Franklin Municipal Securities Trust, seeks to provide
investors with a high current yield exempt from federal and California personal
income taxes by investing in lower-rated or unrated municipal securities. As a
secondary objective, the Fund will seek capital appreciation to the extent that
this is possible and is consistent with its principal investment objective.
There can be no assurance that the Fund's investment objectives will be met.
The Fund invests primarily in municipal securities issued by California and its
political subdivisions, agencies and instrumentalities which pay interest
exempt, in the opinion of counsel, from California state and regular federal
income taxes.
Although exempt from regular federal and state personal income tax, interest
paid on certain types of municipal obligations is deemed to be a preference item
under federal income tax law and subject to the federal alternative minimum tax.
It is possible that the Fund's investments could consist entirely of bonds
subject to the federal alternative minimum tax.
The Fund may invest up to 100% of its portfolio in non-investment grade bonds,
commonly known as "junk bonds," which entail default and other risks greater
than those associated with higher-rated securities. Investors should carefully
assess the risks associated with an investment in the Fund in light of the
securities in which the Fund invests. See "Investment Risk Considerations - Risk
Factors Relating to High Yielding, Fixed-Income Securities" under "Investment
Objectives and Policies of the Fund."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information ("SAI"), concerning the Trust and its
series, dated October 1, 1995 and as may be amended from time to time, provides
a further discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Trust or from the Trust's principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address or telephone number shown above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents Page
Expense Table........................... 3
Financial Highlights.................... 4
About the Trust......................... 4
Investment Objectives and
Policies of the Fund................... 5
Management of the Fund.................. 12
Distributions to Shareholders........... 14
Taxation of the Fund
and Its Shareholders................... 15
How to Buy Shares of the Fund........... 17
Other Programs and Privileges
Available to Fund Shareholders......... 22
Exchange Privilege...................... 24
How to Sell Shares of the Fund.......... 25
Telephone Transactions.................. 29
Valuation of Fund Shares................ 30
How to Get Information Regarding
an Investment in the Fund.............. 30
Performance............................. 31
General Information..................... 32
Account Registrations................... 33
Important Notice Regarding
Taxpayer IRS Certifications............ 34
Portfolio Operations.................... 34
Risk Factors in California.............. 35
Appendix - Description of Municipal
Securities Ratings..................... 36
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
annual operating expenses of the Fund, before advance fee waivers and expense
reductions, for the fiscal year ended May 31, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................. 4.25%
Deferred Sales Charge............................................ NONE*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.................................................. 0.62%+
12b-1 Fees....................................................... 0.09%++
Other Expenses
Reports to shareholders............................... 0.04%
Professional fees..................................... 0.04%
Other expenses........................................ 0.09%
Total Other Expenses............................................. 0.17%
Total Fund Operating Expenses.................................... 0.88%+
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
+Represents the management fee before any fee waiver by the investment manager.
The investment manager has agreed in advance, however, to waive all of its
management fees and to make certain payments to reduce expenses. With this
waiver and expense reduction, the Fund paid no management fees and total
operating expenses represented 0.20% of the average net assets of the Fund.
++Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period:
One Year* Three Years Five Years Ten Years
$51 $69 $89 $146
*assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annual operating expenses, before advance
fee waivers or expense reductions, shown above and should not be considered a
representation of past or future expenses, which may be more or less than those
shown. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. See "Management of the
Fund" for a description of the Fund's expenses. In addition, federal securities
regulations require the example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of the Fund's registration statement, as
indicated below, through the period ended May 31, 1995. The information for the
periods ended May 31, 1994 and 1995 has been audited by Coopers & Lybrand
L.L.P., independent auditors whose audit report appears in the financial
statements in the Trust's Annual Report to Shareholders dated May 31, 1995. See
the discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Distri-
Net Distri- butions Net
Net Asset Net Realized & Total butions From Net Asset Assets Ratio of
Period Value Invest-Unrealized From From Net Realized Total Value at End Expenses Net Income Portfolio
Ended Beginning ment Gain(Loss) InvestmentInvestment Capital Distri- at End Total of Period to Average to Average Turnover
May 31 of Period Incomeon SecuritiesOperationsIncome Gain (Loss)bution of Period Return+(in 000's) Net Assets++Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993** $10.00 $.03 $(.060) $(.030) $ - $ - $ - $9.97 (3.60)%* $ 2,245 -% 3.85%* 8.89%
1994 9.97 .53 (.199) .331 (.558) (.013) (.571) 9.73 3.22 31,938 .07 6.14 40.74%
1995 9.73 .66 .176 .836 (.636) - (.636) 9.93 9.08 51,102 .20 6.89 57.06
</TABLE>
*Annualized
**For the period May 3, 1993 (effective date of registration) to May 31, 1993.
+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value.
++During the period indicated, Franklin Advisers, Inc., the investment manager,
agreed to waive in advance its management fees and made payments of other
expenses incurred by the Fund. Had such action not been taken, the ratio of
operating expenses to average net assets would have been as follows:
1993**................. 1.42%*
1994...................87
1995...................88
About the Trust
The Fund is a non-diversified series of the Trust, an open-end management
investment company commonly called a "mutual fund." The Trust was organized in
Delaware as a business trust and is registered with the SEC under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund and the other series
of the Trust each issue a separate series of shares of beneficial interest and
maintain a totally separate investment portfolio.
The Board of Trustees of the Trust (the "Board") may determine, at a future
date, to offer shares of the Fund in one or more "classes" to permit the Fund to
take advantage of alternative methods of selling Fund shares. "Classes" of
shares represent proportionate interests in the same portfolio of investment
securities but with different rights, privileges and attributes, as determined
by the trustees. Certain funds in the Franklin Templeton Funds, as that term is
defined under "How to Buy Shares of the Fund," currently offer their shares in
two classes, designated "Class I" and "Class II." Because the Fund's sales
charge structure and plan of distribution are similar to those of Class I
shares, shares of the Fund may be considered Class I shares for redemption,
exchange and other purposes.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.25% of the offering price. See "How to Buy Shares of the Fund."
Investment Objectives
and Policies of the Fund
The Fund's principal and secondary investment objectives and other fundamental
policies may not be changed unless approved by the holders of a majority of the
outstanding shares of the Fund, as defined in the 1940 Act. The Fund seeks to
provide investors with a high current yield exempt from federal and California
state personal income taxes by investing in lower-rated or unrated municipal
securities. As a secondary objective, the Fund will seek capital appreciation to
the extent this is possible and is consistent with its principal investment
objective. There, of course, can be no guarantee that the Fund's objectives will
be achieved.
The Fund invests primarily in municipal securities issued by California and its
political subdivisions, agencies and instrumentalities, and in any municipal
obligations of non-state issuers which pay interest exempt from regular federal
and California personal income taxes. Under normal market conditions, the Fund
will invest at least 65% of its total assets in municipal securities which pay
interest exempt from California personal income tax.
Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its net assets in
municipal securities, the interest on which is exempt from regular federal
income taxes. Although exempt from regular federal income tax, interest paid on
certain types of municipal obligations, such as "private activity bonds," and
the dividends to be paid by the Fund therefrom, is deemed to be a preference
item under the federal alternative minimum tax system and therefore subject to
the federal alternative minimum tax. As a result, dividends that would otherwise
be tax-exempt may not be completely tax-exempt to an investor who is subject to
the federal alternative minimum tax, and, therefore, an investment in the Fund
may not be appropriate for such an investor.
Thus, it is possible, although not anticipated, that up to 20% of the Fund's net
assets could be in obligations subject to regular federal taxation and/or up to
35% of the Fund's total assets could be in municipal securities from other
states. In addition, it is possible that the Fund's investments could consist
entirely of bonds subject to the federal alternative minimum tax.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain "private activity bonds" (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal alternative
minimum tax, depending on the shareholder's tax situation. In addition, all
distributions derived from interest exempt from regular federal income tax may
subject a corporate shareholder to, or increase liability under, the federal
alternative minimum tax because such distributions are included in the
corporation's "adjusted current earnings." In states with a corporate franchise
tax, distributions of the Fund may also be fully taxable to a corporate
shareholder under the state franchise tax system.
Consistent with the Fund's investment objectives, the Fund may acquire such
private activity bonds if, in the investment manager's opinion, such bonds
represent the most attractive investment opportunity then available to the Fund.
As of May 31, 1995, the Fund had derived 7.62% of its income from bonds, the
interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
In the event the rating on an issue held in the Fund's portfolio is changed by a
nationally recognized statistical rating organization ("NRSRO"), such event will
be considered by the Fund in its evaluation of the overall investment merits of
that security but will not necessarily result in an automatic sale of the
security. A description of the ratings is contained in Appendix B of this
Prospectus.
For temporary defensive purposes only, when the investment manager believes that
market conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of portfolio value, the Fund may invest (i) more than 20%
of its assets (which could be up to 100%) in fixed-income obligations the
interest on which is subject to regular federal income tax and (ii) more than
35% of the value of its total assets (which could be up to 100%) in instruments
the interest on which is exempt from regular federal income taxes but not
California personal income tax. Any such temporary taxable investments will be
limited to obligations issued or guaranteed by the full faith and credit of the
U.S. government, commercial paper rated P-1 by Moody's, A-1 by S&P, or F-1+ by
Fitch, or obligations of domestic banks with assets of $1 billion or more.
The Fund may borrow from banks for temporary or emergency purposes up to 5% of
its total assets and pledge up to 5% of its total assets in connection
therewith. Consistent with procedures approved by the Board of Trustees, the
Fund may also lend its portfolio securities to qualified securities dealers or
other institutional investors, provided that such loans do not exceed 10% of the
value of the Fund's total assets at the time of the most recent loan. The Fund
currently intends to limit its lending of securities to no more than 5% of its
total assets.
The Fund expects that its portfolio turnover rate will generally not exceed
100%, but this rate should not be construed as a limiting factor in the
operation of the Fund's portfolio.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of California, obligations of non-state issuers, such as
the territories and possessions of the United States ("U.S."), any state, or the
District of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from regular federal income
tax. A portion or all of the interest on such securities may be deemed to be
preference items under the federal alternative minimum tax system and thus
subject to the federal alternative minimum tax. An opinion as to the tax-exempt
status of a municipal security generally is rendered to the issuer by the
issuer's counsel at the time of issuance of the security.
Municipal securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to provide funding for privately operated
facilities. Further information on the maturity and funding classifications of
municipal securities is included in the SAI.
The Fund has no restrictions on the maturities of municipal securities in which
the Fund may invest. The manager will consider the Fund's investment objective
and current market conditions in determining which securities to buy or hold.
It is possible that the Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In such circumstances, economic, business, political, or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or declining
markets or need for the projects) might also affect other bonds in the same
segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to make timely payment of principal and
interest on its obligations.
The Fund may invest in variable or floating rate demand notes ("VRDNs"). VRDNs
are tax-exempt obligations which bear interest at rates that are not fixed, but
that vary with changes in prevailing market rates on predesignated dates, and
which carry a demand feature that permits the Fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation, which amount may be more or
less than the amount the Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements. Because of
the demand feature, the prices of VRDNs may be higher and the yields lower than
they otherwise would be for obligations without a demand feature. The Fund will
limit its purchase of municipal securities that are floating rate and variable
rate obligations to those meeting the quality standards set forth in this
Prospectus.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. For example, COPs may be created when long-term
lease revenue bonds are issued by a governmental corporation to pay for the
acquisition of property or facilities which are then leased to a municipality.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs enable a governmental issuer
to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease without penalty if the municipality's appropriating body
does not allocate the necessary funds. Local administrations, being faced with
increasingly tight budgets, therefore have more discretion to curtail payments
under COPs than they do to curtail payments on traditionally funded debt
obligations. If the government lessee does not appropriate sufficient monies to
make lease payments, the lessor or its agent is typically entitled to repossess
the property. The private sector value of the property may be more or less than
the amount the government lessee was paying.
The Board reviews the COPs held in the Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by the
investment manager and monitored by the Board. Such factors include (a) the
credit quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of comparable quality to the rating required for the Fund's investment,
including an assessment of the likelihood that the leases will not be canceled;
(b) the size of the municipal securities market, both in general and with
respect to COPs; and (c) the extent to which the type of COPs held by the Fund
trade on the same basis and with the same degree of dealer participation as
other municipal bonds of comparable credit rating or quality. While there is no
limit as to the amount of assets which the Fund may invest in COPs, as of May
31, 1995, the Fund held 18.50% of its total net assets in COPS and other
municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for 5 to 10 years, after which time such bonds may be called away.
An issuer may generally be expected to call its bonds, or a portion of them,
during periods of declining interest rates, when borrowings may be replaced at
lower rates than those obtained in prior years. If the purchase price of such
bonds included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the Fund,
depending on the price at which such bonds were redeemed.
Investment Risk Considerations
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce such risk. There are two
categories of risks to which the Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price.
Market risk is the risk of price fluctuation of a municipal security caused by
changes in general economic and interest rate conditions generally affecting the
market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the price of the debt securities in which
the Fund invests are likely to decrease in times of rising interest rates.
Conversely, when rates fall, the value of the Fund's debt investments may rise.
Price changes of debt securities held by the Fund have a direct impact on the
net asset value per share of the Fund securities, and there are certain specific
factors and considerations concerning California which may affect the credit and
market risk of the these municipal securities. These factors are described in
"Risk Factors in California" below and in greater detail in the SAI.
As a non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested by the Fund at any time in the
securities of any one issuer. However, the Fund intends to comply with the asset
diversification, income, distribution and other requirements of the Code
applicable to "regulated investment companies" so that it will not be subject to
federal income tax and distributions to shareholders will be free from regular
federal income tax to the extent that they are derived from municipal
securities. Accordingly, the Fund will not purchase a security if, as a result,
more than 25% of its total assets would be invested in the securities of a
single issuer, or with respect to 50% of its total assets, more than 5% of such
assets would be invested in the securities of a single issuer. To the extent the
Fund is not fully diversified under the 1940 Act, it may be more susceptible to
adverse economic, political or regulatory developments affecting a single issuer
than would be the case if the Fund were more broadly diversified.
The Fund seeks to provide California investors with a high current yield exempt
from federal and California personal income taxes by investing primarily in
lower-rated or unrated municipal securities. Higher yields are ordinarily
available from securities in the lower-rated categories of the NRSRO (that is,
municipal securities rated Baa or lower by Moody's Investors Service
("Moody's"), BBB or lower by S&P), or BBB or lower by Fitch Investors Service,
Inc. ("Fitch") or from unrated securities of comparable quality. These ratings
represent the opinions of the NRSROs with respect to the generally higher risk
associated with the issuer's ability to pay interest and repay principal. They
do not purport to reflect the risk of fluctuations in market value and are not
absolute standards of quality but will be considered in connection with the
investment of the Fund's assets.
The Fund may invest in municipal securities regardless of their rating
(including municipal securities in the lowest-rating categories) or in unrated
securities. It will generally invest in municipal securities which have received
one of the middle four ratings assigned by Moody's (Ba, B, Caa and Ca), S&P (BB,
B, CCC and CC), or Fitch (BB, B, CCC and CC) or in unrated securities which are
judged by management to be of equal quality. Securities in these ratings
categories are regarded, on balance, as predominantly speculative with respect
to the capacity to pay interest and repay principal in accordance with the terms
of the obligation. The Fund may invest in municipal securities regardless of
their rating, including, from time to time, defaulted debt securities if, in the
opinion of the investment manager, the issuer may resume interest payments or
other advantageous developments appear likely, in the near term. The Fund will
not invest more than 5% of its total assets (at the time of purchase) in
defaulted securities. A purchase of a security which is in default carries a
high degree of risk and may have the consequence that interest payments with
respect to such security may be reduced, deferred, suspended, or canceled,
causing the loss of the entire amount of the investment. See also the disclosure
of lower-rated securities below under "Risk Factors Relating to High Yielding,
Fixed-Income Securities." While it is expected that the portfolio of the Fund
will normally consist of lower-rated, higher yielding bonds, there may be
instances when the portfolio will contain medium grade (BBB or Baa rated), lower
yielding bonds because adequate quantities of attractive lower-rated bonds are
not available at that time. In addition, there may be times when, due to unusual
market conditions, or when the difference in yields on higher and lower-rated
bonds is narrowed to the extent that higher risk is not justified by higher
return, that the Fund may acquire higher-rated bonds for its portfolio. It is
expected that the Fund's portfolio will generally consist of longer-term
municipal securities as these normally return higher yields than short-term
issues.
Risk Factors Relating to High Yielding,
Fixed-Income Securities
The portfolio of the Fund is subject to greater risks due to its ability to
invest in municipal securities rated below investment grade by the NRSROs, or
which are unrated by an NRSRO but deemed by the investment manager to be of
comparable quality. The market values of such securities, commonly known as junk
bonds, tend to reflect individual developments affecting the issuer to a greater
extent than do higher-rated securities, which react primarily to fluctuations in
the general level of interest rates. Such lower-rated securities also tend to be
more sensitive to economic conditions than higher-rated securities. These
lower-rated fixed-income securities are considered by the NRSROs, on balance, to
be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
will generally involve more credit risk than securities in the higher rating
categories. Even securities rated BBB or Baa by S&P, Moody's or Fitch, ratings
which are considered investment grade, possess some speculative characteristics.
Projects which are financed by the issuance of high yielding, fixed-income
securities are often highly leveraged and may not have more traditional methods
of financing available to them. Therefore, the risk associated with acquiring
the securities of such issuers is generally greater than is the case with
higher-rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, projects financed by high yielding securities
may experience financial stress. During such periods, such projects may not have
sufficient cash flow to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments, or the issuer's inability to meet specific projected
revenue forecasts, or by the unavailability of additional financing.
To the extent the secondary trading market for a particular high yielding,
fixed-income security does exist, it is generally not as liquid as the secondary
market for higher-rated securities. Reduced liquidity in the secondary market
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
Current value for these high yield issues are obtained from pricing services
and/or a limited number of dealers and may be based upon factors other than
actual sales. (See "Valuation of Fund Shares.")
Factors adversely impacting the market value of high yielding securities may
adversely impact the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on the investment manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the investment manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
As of May 31, 1995, none of the issues in the Fund's portfolio were in default,
and none have been in default since the Fund's inception. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
if the Fund later has defaulted bonds, the Fund may have unrealized losses on
such defaulted securities which are reflected in the price of the Fund's shares.
In general, securities which default lose much of their value in the time period
prior to the actual default so that the Fund's net assets are impacted prior to
the default. The high yield securities market is relatively new and much of its
growth prior to 1990 paralleled a long economic expansion. The recent recession
disrupted the market for high yield securities and adversely affected the value
of outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. The Fund may retain an issue which has defaulted because such issue
may present an opportunity for subsequent price recovery. As previously noted,
the Fund may also, consistent with its investment objectives and policies
purchase debt obligations of issuers not currently paying interest as well as
issuers that are in default. Issues that are in default carry a high degree of
risk and may have the consequence that interest payments with respect to such
securities may be reduced, deferred, suspended, eliminated or never begin, and
may have the further consequences that principal payments may likewise be
reduced, suspended or canceled, causing the loss of the entire amount of the
investment.
As of May 31, 1995, approximately 23.35% of the Fund's assets were invested in
municipal securities which were rated lower than investment grade (rated below
the four highest grades assigned by the NRSROs) or in securities unrated by any
NRSRO but deemed by the investment manager to be of comparable credit
characteristics. (A breakdown of the bonds' ratings in the Fund's portfolio,
based on a dollar weighted average for the fiscal year ended May 31, 1995, is
included in the "Asset Composition Table" below.)
Because of the Fund's policy of seeking high current yield and its ability to
invest in lower-grade debt securities including defaulted securities, a higher
degree of risk accompanies an investment in the Fund's shares than is the case
in a more conservative tax-free, income-type investment company. As with any
other investment, there is no assurance that the Fund's objective will be
obtained.
The Fund's investment in lower-rated, unrated, and zero coupon municipal
securities may cause this Fund to recognize income and make distributions to
shareholders prior to the receipt of cash payments by the Fund. For example,
with respect to any non-performing obligations, this Fund may be required to
accrue as income the original amount of interest due on its obligations even
though such interest is not received by the Fund. In order to generate cash to
satisfy the Fund's distribution requirements, it may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. The SAI contains
more information about zero coupon bonds.
Asset Composition Table
A credit rating by an NRSRO evaluates only the safety of principal and interest
of the bond, and does not specifically consider the market value risk associated
with an investment in such a bond. The table below shows the percentage invested
in each of the specific S&P rating categories and those that are not rated but
deemed by the investment manager to be of the same credit quality. The
information was prepared based on a dollar weighted average of the Fund's
portfolio based on month-end assets for each of the 12 months in the fiscal year
ended May 31, 1995. The Appendix to this Prospectus includes a description of
each rating category.
Average Weighted
S&P Rating Percentage of Assets
AAA........................... 1.54%
AA............................ 4.29
A............................. 28.25
A*............................ 1.41
BBB........................... 19.66
BBB*.......................... 21.50
BB*........................... 23.35
*Not rated by the NRSROs. Indicates an internal rating by the Fund's investment
manager.
How Shareholders Participate
in the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Trust
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly-owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (115 separate series) with aggregate assets of over $77 billion,
approximately $40.8 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended May 31, 1995, management fees, before any advance
waiver, totaled .62% of the average monthly net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
.88% of the average monthly net assets of the Fund. Pursuant to an agreement by
Advisers to waive its fees, the Fund paid no management fees and paid operating
expenses totaling 0.20% of the average monthly net assets of the Fund.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions which involve the receipt by the broker of a spread between the bid
and the ask prices for the securities, and not the receipt of commissions. To
the extent that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
such transactions will be effected. The Manager would try to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or
others for all expenses incurred by Distributors or others in the promotion and
distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.15% per annum
of the average daily net assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.15% per annum will be
borne by Distributors, or others who have incurred them, without reimbursement
from the Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers, or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund. For more information, please
see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gain in any year or adjust the timing of
these distributions for operational or other reasons.
Distribution Date
Although subject to change by the Trust's Board without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. The amount of income dividend payments by the Fund is dependent upon the
amount of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. The Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds. Shareholders in Class II
funds may also direct their dividends and capital gain distributions for
investment in a Class I Franklin Templeton Fund at net asset value. Shareholders
have the right to change their election with respect to the receipt of
distributions by notifying the Fund, but any such change will be effective only
as to distributions for which the reinvestment date is seven or more business
days after the Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to a Class I
Franklin Templeton Fund, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Dividends which may be paid in the interim
will be sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's Shareholder Services
Department. See "Purchases at Net Asset Value" under "How to Buy Shares of the
Fund."
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
All series of the Trust are treated as separate entities for federal and state
income tax purposes. The Fund intends to continue to qualify for treatment as a
regulated investment company under Subchapter M of the Code.
By distributing all of its income and by meeting certain other requirements
relating to the sources of its income and diversification of its assets, the
Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders. Such
exempt-interest dividends are derived from interest income exempt from regular
federal income tax and are not subject to regular federal income tax for Fund
shareholders.
To the extent that dividends paid by the Fund are derived from interest income
from debt obligations of California or its political subdivisions or from
interest on U.S. territorial obligations (including Puerto Rico, the U.S. Virgin
Islands or Guam) which are exempt from regular federal and California personal
income tax, they will not be subject to either federal or California personal
income tax when received by the Fund's shareholders. The pass-through of exempt
interest dividends is allowed only if the Fund meets its federal and California
requirements that at least 50% of its total assets are invested in such exempt
obligations at the end of each quarter of its fiscal year. In addition, to the
extent that dividends are derived from direct obligations of the federal
government, they will also be exempt from California personal income taxes.
However, for corporate taxpayers subject to the California franchise tax, all
distributions will be fully taxable.
To the extent dividends paid by the Fund are derived from taxable income from
temporary investments (including the discount from certain stripped obligations
or their coupons or income from securities loans or other taxable transactions),
from the excess of net short-term capital gain over net long-term capital loss,
or from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993 they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount and such market discount
exceeds a de minimus amount under the Code. For such obligations purchased after
April 30, 1993, a portion of the gain on sale or disposition (not to exceed the
accrued portion of market discount as of the time of sale or disposition) is
treated as ordinary income rather than capital gain. Any distribution by the
Fund of such ordinary income to its shareholders will be subject to regular
federal and state income taxes in the hands of Fund shareholders. In any fiscal
year, the Fund may elect not to distribute to its shareholders its taxable
ordinary income and to, instead, pay federal income or excise taxes on this
income at the Fund level. The amount of such distributions, if any, is expected
to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if received by the shareholder on December 31 of the calendar year in which they
are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned shares of the Fund and regardless of
whether such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on a sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares and will be disallowed to the extent of exempt interest
dividends paid with respect to such shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or interest
income that is a tax preference item under the federal alternative minimum tax.
Shareholders who have not held shares of the Fund for a full calendar year may
have designated as tax-exempt or as tax preference income a percentage of income
which is not equal to the actual amount of tax-exempt or tax preference income
earned during the period of their investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest on their federal
income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares may not be fully deductible for federal income tax
purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
The foregoing description relates solely to federal income tax law and to
California personal income tax treatment to the extent indicated. Shareholders
should consult their tax advisors with respect to the applicability of other
state and local income taxes to their shares in the Fund and to distributions
and redemption proceeds received from the Fund. Corporate, individual and trust
shareholders should contact their tax advisors to determine the impact of Fund
dividends and capital gain distributions under the federal alternative minimum
tax that may be applicable to a shareholder's particular tax situation.
How to Buy Shares of The Fund
Shares of the Fund are continuously offered through securities dealers who
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Trust and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Purchase Price of Shares of the Fund
Shares of the Fund are offered at the public offering price, which is determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after the shareholder's securities dealer receives the order which
is promptly transmitted to the Fund or (2) after receipt of an order by mail
from the shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. The offering price will be calculated to two decimal places using standard
rounding criteria. A description of the method of calculating net asset value
per share is included under the caption "Valuation of Fund Shares."
Set forth below is a table showing front-end sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentageof Net Amount as a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributor, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction) and (c) the U.S.
registered mutual funds in the Templeton Group of Funds except Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton
Funds are collectively referred to as the "Franklin Templeton Funds.") Sales
charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1% of the amount purchased
to securities dealers who initiate and are responsible for purchases made at net
asset value by certain trust companies and trust departments of banks. See
definition under "Description of Special Net Asset Value Purchases" and as set
forth in the SAI.
Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds, and other
dealer-sponsored programs or events. In some instances, this compensation may be
made available only to certain securities dealers whose representatives have
sold or are expected to sell significant amounts of shares of the Franklin
Templeton Funds. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Securities
dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor (except for certain employee benefit plans which are listed under
"Description of Special Net Asset Value Purchases") acknowledges and agrees to
the following provisions by completing the Letter of Intent section of the
Shareholder Application: Five percent (5%) of the amount of the total intended
purchase will be reserved in shares of the Fund, registered in the investor's
name, to assure that the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will be included in the
total shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information, see "Additional Information Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.50%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors and seek to arrange for payroll
deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) registered securities dealers and
their affiliates, for their investment account only; and (5) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. If a
different class of shares is purchased, the full front-end sales charge must be
paid at the time of purchase of the new shares. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares redeemed in connection
with an exchange into another of the Franklin Templeton Funds (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within 365
days after the redemption. The 365 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Shares of the Fund or another of the Franklin Templeton Funds Class I shares may
be purchased at net asset value and without a contingent deferred sales charge
by persons who have received dividends and capital gains distributions in cash
from investments in the Fund within 365 days of the payment date of such
distribution. Class II shareholders may also invest such distributions at net
asset value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge and which has investment objectives
similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof, which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin Templeton Institutional
Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in the Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.
Refer to the SAI for further information regarding net asset value purchases.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of shares may be subject
to a contingent deferred sales charge if the shares are redeemed within 12
months of the calendar month of the original purchase date. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect. The applicable contingent deferred sales charge is waived for share
redemptions of up to 1% monthly of an account's net asset value (12% annually,
6% semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge; any amount over that $120,000 would
be assessed a 1% contingent deferred sales charge. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives or policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for shares of other Franklin Templeton Funds Class I shares which are
eligible for sale in the shareholder's state of residence and in conformity with
such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectus of the fund they wish
to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges. No exchanges between
different classes of shares are allowed and, therefore, shares of the Fund may
not be exchanged for Class II shares of other Franklin Templeton Funds.
Shareholders may choose to redeem shares of the Fund and purchase Class II
shares of other Franklin Templeton Funds but such purchase will be subject to
that Fund's Class II front-end and contingent deferred sales charges for the
contingency period of 18 months.
Exchanges may be made in any of the following ways:
Exchanges by Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges by Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
Franklin Templeton Funds Class I shares. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in the shareholder's account. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine.
Please refer to "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period such shares are exchanged
into and held in a Franklin or Templeton money market fund. See also "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such 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 Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
"Timing Accounts" are not permitted to purchase shares of the Fund or to
exchange into the Fund. This policy does not affect any other types of investor.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated (at the
scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled closing of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions By Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The SAI contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on investments of $1
million or more redeemed within the contingency period of 12 months of the
calendar month of such investment will be assessed a contingent deferred sales
charge, unless one of the exceptions described below applies. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than the contingency
period; and followed by any shares held less than the contingency period, on a
"first in, first out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: exchanges;
any account fees; redemptions through a Systematic Withdrawal Plan set up for
shares prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually); redemptions initiated by the Fund
due to a shareholder's account falling below the minimum specified account size;
and redemptions following the death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions for a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including (i) effect a change in address, (ii) change a dividend option, (iii)
transfer Fund shares in one account to another identically registered account in
the Fund,(iv) request the issuance of certificates (to be sent to the
shareholder's address of record only) and (v) exchange Fund shares as described
in this Prospectus by telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the Fund - Redemptions By
Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of the scheduled
closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities is deducted from the aggregate gross value of
all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts and
interest is recorded as accrued. Over-the-counter portfolio securities are
valued within the range of the most current bid and ask prices. Interest is
recorded as accrued and dividends are recorded on the ex-dividend date.
Portfolio securities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most representative
market as determined by the Manager. Municipal securities generally trade in the
over-the-counter market rather than on a securities exchange. 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 trustees, the Fund may utilize a
pricing service, bank or securities dealer to perform any of the above described
functions.
How to Get Information
Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain account information, current price and, if available, yield or other
performance information specific to each Fund or any Franklin Templeton Fund. In
addition, Franklin Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements, money fund checks, if applicable, and
deposit slips.
Information about each Fund may be accessed by entering Fund Code 175 followed
by the # sign. The system's automated operator will prompt the caller with easy
to follow step-by-step instructions from the main menu. Other features may be
added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone.
Department Name Telephone No. Hours of Operation (Pacific Time)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton's
service departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including the current yield, various
expressions of total return, tax equivalent yield, current distribution rate and
taxable equivalent distribution rate. They may occasionally cite statistics to
reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC (see the SAI) are not indicative of the dividends
or distributions which were or will be paid to the Fund's shareholders.
Dividends or distributions paid to shareholders are reflected in the current
distribution rate or taxable equivalent distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after-tax
distribution rate equivalent to the Fund's distribution rate (calculated as
indicated above). Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's total return, current yield, tax equivalent yield, distribution rate
or taxable equivalent distribution rate may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends May 31. Annual Reports containing audited financial
statements of the Trust, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to
shareholders. To reduce the volume of mail sent to one household as well as to
reduce Fund expenses, Investor Services, will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained by investors or shareholders, without charge,
upon request to the Trust at the telephone number or address set forth on the
cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Delaware business trust on November 19, 1991. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest with a par value of
$.01, which may be issued in any number of series and classes. Shares issued
will be fully paid and non-assessable and will have no preemptive, conversion,
or sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions, as declared by such series, and the net assets of
such series upon liquidation or dissolution. The Trust reserves the right to
issue additional classes of shares of the Fund, or to add additional series to
the Trust.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees,
the holders of more than 50% of the shares of the Trust voting can elect all of
the trustees, if they choose to do so, and, in such event, the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board. The Trust does not intend to hold annual shareholders' meetings. The
Trust may, however, hold a special shareholders' meeting of a series for such
purposes as changing fundamental investment restrictions for the series,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
the trustees in their discretion or by shareholders holding at least ten percent
of the outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the TIN furnished by the shareholder is incorrect
or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio:
Thomas Kenny, Senior Vice President and Portfolio Manager. Mr. Kenny is director
of Franklin's municipal bond department. He joined Franklin in 1986 and has been
responsible for making portfolio recommendations and decisions for the Fund
since August 1994. He received a Bachelor of Arts degree in Business and
Economics from the University of California at Santa Barbara and Master of
Science degree in Finance from Golden Gate University. He is a member of several
municipal securities industry-related committees and associations.
Sheila Amoroso, Portfolio Manager. Ms. Amoroso has been responsible for
portfolio recommendations and decisions for the Fund since August 1994. She
joined Franklin in 1986. She holds a Bachelor of Science degree from San
Francisco State University and is a member of municipal securities
industry-related committees and associations.
Bernie Schroer, Vice President and Senior Portfolio Manager, joined Advisers in
1987. Mr. Schroer has been responsible for portfolio recommendations and
decisions for the Fund since the Fund's inception. From 1974 to 1984, he was the
manager of trading at Kidder Peabody and Company, Inc. He has a degree in
finance from Santa Clara University and is a member of municipal securities
industry-related committees and associations.
Risk Factors in California
The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon information
derived from public documents relating to securities offerings of California
state and municipal issuers, from independent municipal credit reports and
historically reliable sources, but has not been independently verified by the
Fund.
California constitutional and other laws affect the ability of California state
and municipal issuers to obtain sufficient revenue to pay their bond
obligations. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem taxes on
real property and restricts the ability of taxing entities to increase real
property taxes. Legislation passed subsequent to Proposition 13, however,
provided for the redistribution of California's General Fund surplus to local
agencies, the reallocation of revenues to local agencies and the assumption of
certain local obligations by the state so as to help California municipal
issuers to raise revenue to pay their bond obligations. It is unknown, however,
whether additional revenue redistribution legislation will be enacted in the
future and whether, if enacted, such legislation would provide sufficient
revenue for such California issuers to pay their obligations. The state is also
subject to another constitutional amendment, Article XIIIB, which may have an
adverse impact on California state and municipal issuers. Article XIIIB
restricts the state from spending certain appropriations in excess of an
appropriations limit imposed for each state and local government entity. If
revenues exceed such appropriations limit, such revenues must be returned either
as revisions in the tax rates or fee schedules.
The past four years have challenged California's resiliency, as cyclical and
structural problems have been addressed. The national recession severely
affected California and its effects have lingered. The magnitude of California's
military-industrial complex and effects of the recession has resulted in a loss
of more than 700,000 jobs. Of the approximate 700,000 jobs lost, it is estimated
that more than 240,000 have been restored. Base closures have likewise impacted
state and local economies. California's social welfare and entitlement programs
have strained finances as caseload growth has exceeded resource availability.
The high priority of public safety has resulted in the enactment of strong crime
legislation that is both capital and labor intensive. California has also been
affected by natural catastrophes including earthquakes, wildfires, floods and
droughts.
By the fall of 1993, it had become apparent the California economy had reached a
trough and recovery was underway. During 1994 the state's economy paralleled the
broad-based expansion occurring on the national level. California's economy
continued to gain momentum through 1994 as revenue collections exceeded budget
projections. The state's unemployment rate opened at 10.1 percent in 1994 and
declined to 7.7 percent at calendar year-end. California's unemployment rate
rose slightly in January 1995 to 8.2 percent, perhaps reflecting the effect of
seven interest rate increases over the past year. The number of jobless in
January 1995 was approximately 1.3 million, reflecting a decrease of 300,000
from the prior year.
In early July 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California from A+ to A and Aa to A1, respectively.
These revisions reflected the state's heavy reliance on the short-term note
market to finance its cash imbalance and the likelihood that this exposure will
persist for at least another two years. For more information on these ratings
revisions and the state's current budget, please refer to the Fund's SAI.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Orange County Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code after reports that the Orange County
Funds had suffered significant market losses in their investments, causing a
liquidity crisis for the Orange County Funds and the County. More than 180 other
public entities, most of which, but not all, are located in the County, were
also depositors in the Orange County Funds. As of mid-January, 1995, following a
restructuring of most of the Orange County Funds' assets to increase their
liquidity and reduce their exposure to interest rate increases, the County
estimated the Orange County Funds' loss at about $1.69 billion, or 22% of their
initial deposits of approximately $7.5 billion. Following the bankruptcy filing
many of the entities which deposited money in the Orange County Funds, including
the County, faced cash flow difficulties because of the bankruptcy filing and
would have been required to reduce programs or capital projects. On May 2, 1995,
the bankruptcy court approved a settlement between the County and the Pool
Participants which provides for Pool Participants to receive 100% of their
investment balances. The settlement provides an initial cash distribution of 77%
if their aggregate investment balance followed by a combination of recovery
notes and other claims. The initial 77% distribution was released on May 19,
1995, which greatly reduces the cash flow difficulties faced by depositors. As
of May 31, 1995, the Fund did not own any direct Orange County obligations.
The state has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county administered state programs
because of insufficient resources, it may be necessary for the state to
intervene, but the State cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Orange County
Fund. Under existing legal precedent, the state is obligated to intervene when a
school district's fiscal problems would otherwise deny its students basic
educational quality. The state is not presently able to predict whether any
school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the state may have
to provide. The Governor has called a special session of the Legislature which
is expected to consider various responses to the Orange County situation.
Appendix -
Description of Municipal Securities Ratings
Municipal Bonds
Moody's Investors Service ("Moody's")
Aaa: Municipal bonds which are 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 by an
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 which are 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 as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are 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: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are 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. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation ("S&P")
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates and, hence, provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch Investors Services, Inc. ("Fitch")
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: 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 bonds: 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 bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB bonds: Considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B bonds: 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 bonds: 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 bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.
C bonds: Imminent default in payment of interest or principal.
DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
Municipal Notes
Moody's
Moody's ratings for state, municipal, and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Franklin
Municipal
Securities Trust
Franklin Arkansas Municipal Bond Fund
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
PROSPECTUS October 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Municipal Securities Trust (the "Trust") is an open-end management
investment company consisting of five separate, non-diversified series. This
Prospectus relates only to the Franklin Arkansas Municipal Bond Fund (the
"Arkansas Fund"), the Franklin Hawaii Municipal Bond Fund (the "Hawaii Fund"),
the Franklin Tennessee Municipal Bond Fund (the "Tennessee Fund") and the
Franklin Washington Municipal Bond Fund (the "Washington Fund"), each of which
may collectively or separately be referred to hereafter as the "Funds" or
"Fund." The Funds seek to provide investors with as high a level of income
exempt from regular federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The Arkansas,
Hawaii and Tennessee Funds also seek to provide a maximum level of income which
is exempt from the state personal income taxes for resident shareholders of each
such state. The state of Washington currently imposes no state income tax.
Each Fund invests primarily in municipal securities issued by its respective
state and the state's political subdivisions, agencies and instrumentalities
which pay interest exempt, in the opinion of counsel to the issuer, from such
state's personal income taxes (if any) and regular federal income taxes.
This Prospectus is intended to set forth in a clear and concise manner
information about each Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency. Shares of the Funds involve investment risks, including the possible
loss of principal.
A Statement of Additional Information ("SAI") concerning the Trust and the
Funds, dated October 1, 1995, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Trust or the Trust's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents Page
Expense Table.................... 3
Financial Highlights............. 5
About the Trust.................. 6
Investment Objective and
Policies of the Funds........... 6
Management of the Trust.......... 12
Distributions to Shareholders.... 14
Taxation of the Funds
and Their Shareholders.......... 15
How to Buy Shares of Each Fund... 17
Other Programs and Privileges
Available to Fund Shareholders.. 22
Exchange Privilege............... 24
How to Sell Shares of Each Fund.. 26
Telephone Transactions........... 30
Valuation of Shares of Each Fund. 30
How to Get Information Regarding
an Investment in Each Fund...... 31
Performance...................... 32
General Information.............. 33
Account Registrations............ 34
Important Notice Regarding
Taxpayer IRS Certifications..... 34
Portfolio Operations............. 35
Special Factors Affecting Each
Fund ............................ 35
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in each Fund. These figures are based on aggregate
operating expenses of each Fund (before fee waivers and expense reductions) for
the fiscal year ended May 31, 1995.
Arkansas Hawaii Tennessee Washington
Fund Fund Fund Fund
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........ 4.25% 4.25% 4.25% 4.25%
Deferred Sales Charge*...................... None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees**........................... 0.62% 0.63% 0.62% 0.62%
12b-1 Fees***............................... 0.03% 0.07% 0.05% 0.05%
Other Expenses:
Reports to Shareholders..................... 0.12% 0.03% 0.09% 0.07%
Professional Fees........................... 0.18% 0.04% 0.10% 0.08%
Other....................................... 0.16% 0.10% 0.06% 0.23%
Total Other Expenses........................ 0.46% 0.17% 0.25% 0.38%
Total Fund Operating Expenses**............. 1.11% 0.87% 0.92% 1.05%
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How to Sell Shares of Each Fund - Contingent
Deferred Sales Charge."
**Represents the management fee before any fee waiver by the investment manager.
The investment manager has agreed in advance, however, to waive all of its
management fees and to make certain payments to reduce expenses. With this
waiver and expense reduction, the Funds paid no management fees and total
operating expenses represented .10%, .20%, .10% and .10% of the average net
assets of the Arkansas Fund, Hawaii Fund, Tennessee Fund and Washington Fund,
respectively. This arrangement may be terminated by the investment manager at
any time.
*** The maximum amount of Rule 12b-1 fees allowed pursuant to the Funds'
distribution plans is 0.15% for the Arkansas, Tennessee and Washington Funds and
0.10% for the Hawaii Fund. See "Plans of Distribution" under "Management of the
Trust." Consistent with National Association of Securities Dealers, Inc.'s
rules, it is possible that the combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in a Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in a Fund over various time periods assuming (1) a 5% annual rate of return and
(2) redemption at the end of each time period:
One Year* Three Years Five Years Ten Years
Arkansas Fund......... $53 $76 $101 $172
Hawaii Fund........... 51 69 89 145
Tennessee Fund........ 51 71 91 151
Washington Fund....... 53 74 98 165
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annual operating expenses of each Fund,
before fee waivers or expense reductions, shown above and should not be
considered a representation of past or future expenses, which may be more or
less than those shown. The operating expenses are borne by each Fund and only
indirectly by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but a Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
each of the Funds from the effective date of the registration statement or
amendment thereof for each Fund, as indicated below, through the fiscal year
ended May 31, 1995. The information for each of the periods has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders dated May
31, 1995. See the discussion "Reports to Shareholders" under "General
Information."
<TABLE>
<CAPTION>
Distri- Distri- Net Ratio of Net
Net Asset Net Net Realized butions butions Net Asset Assets Ratio of Investment
Period Value Invest- & Unrealized Total From From Net From Total Value at at End Expenses Income to Portfolio
Ended Beginning ment Gain(Loss) Investment Investment Capital Distri- End of Total of Period to Average Average Turnover
May 31 of Period Income on Securities Operations Income Gains butions Period Return+(in 000's)Net Assets++ Net Assets Rate
Franklin Arkansas Municipal Bond Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19941 $10.00 $.01 $.050 $ .060 $(.- .- .- $10.06 .60% $ 2,213 .03%* 2.00%* .-%
1995 10.06 .51 .191 .701 (.441) .- (.441) 10.32 7.27 4,134 .10 5.64 77.63
Franklin Hawaii Municipal Bond Fund
19923 10.00 .09 .158 .248 (.068) .- (.068) 10.18 8.96* 2,978 .- 4.55* .-
1993 10.18 .63 .634 1.264 (.644) .- (.644) 10.80 12.77 18,657 .- 5.95 48.70
1994 10.80 .62 (.459) .161 (.601) .- (.601) 10.36 1.35 26,904 .05 5.76 31.35
1995 10.36 .60 .310 .910 (.600) .- (.600) 10.67 9.26 36,827 .20 6.02 22.88
Franklin Tennessee Municipal Bond Fund
19941 10.00 .01 .100 .110 .- .- .- 10.11 1.10 2,224 .03* 1.89* 22.64
1995 10.11 .52 .353 .873 (.453) .- (.453) 10.53 8.97 5,986 .10 6.02 24.71
Franklin Washington Municipal Bond Fund
19932 10.00 .03 (.040) (.010) .- .- .- 9.99 (1.20)* 2,198 .- 3.44* .-
1994 9.99 .51 (.464) .046 (.472) (.014) (.486) 9.55 2.88 4,272 .05 5.59 39.52
1995 9.55 .56 .355 .915 (.565) .- (.565) 9.90 10.10 5,741 .10 6.13 18.46
</TABLE>
* Annualized.
1For the period May 10, 1994 (effective date of registration) to May 31, 1994.
2For the period May 3, 1993 (effective date of registration) to May 31, 1993.
3For the period February 26, 1992 (effective date of registration) to May 31,
1992.
+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends and capital gains at net asset value.
++During the periods indicated, the investment manager agreed to waive in
advance a portion of its management fees and made payments of other expenses
incurred by the Funds in the Trust. Had such action not been taken, the ratios
of operating expenses to average net assets would have been as follows:
Ratio of
expenses
to average
net assets
Franklin Arkansas Municipal Bond Fund
19941......................... 1.20%*
1995.......................... 1.11
Franklin Hawaii Municipal Bond Fund
19923......................... 1.57*
1993.......................... 1.06
1994........................... 92
1995........................... 87
Ratio of
expenses
to average
net assets
Franklin Tennessee Municipal Bond Fund
19941......................... 1.05%*
1995.......................... 92
Franklin Washington Municipal Bond Fund
19932......................... 1.44*
1994.......................... 71
1995.......................... 1.05
About the Trust
The Trust is an open-end management investment company, commonly called a mutual
fund. The Trust was organized in November 1991 as a Delaware business trust, and
registered with the SEC under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Trust currently consists of five non-diversified series,
each of which issues a separate series of the Trust's shares and maintains a
totally separate investment portfolio.
The Board of Trustees of the Trust (the "Board") may determine, at a future
date, to offer shares of each Fund in one or more "classes" to permit a Fund to
take advantage of alternative methods of selling Fund shares. "Classes" of
shares represent proportionate interests in the same portfolio of investment
securities but with different rights, privileges and attributes, as determined
by the trustees. Certain funds in the Franklin Templeton Funds, as that term is
defined under "How to Buy Shares of Each Fund," currently offer their shares in
two classes, designated "Class I" and "Class II." Because each Fund's sales
charge structure and plan of distribution are similar to those of Class I
shares, shares of each Fund may be considered Class I shares for redemption,
exchange and other purposes.
Shares of each Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Shares of Each Fund") plus a sales
charge not exceeding 4.25% of the offering price. See "How to Buy Shares of Each
Fund."
Investment Objective
and Policies of the Funds
The Funds seek to provide investors with as high a level of income exempt from
regular federal income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The Arkansas, Hawaii and
Tennessee Funds also seek to provide a maximum level of income which is exempt
from the state personal income taxes for resident shareholders of each such
state. The state of Washington currently imposes no personal income tax. The
objective is a fundamental policy of each Fund and may not be changed without
shareholder approval. Each Fund intends to invest primarily in municipal
securities issued by its respective state and the state's political
subdivisions, agencies and instrumentalities which pay interest exempt from such
state's personal income taxes (if any) and regular federal income taxes. There
is, of course, no assurance that each Fund's objective will be achieved.
Under normal market conditions, each Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its net assets in
municipal securities the interest on which is exempt from regular federal income
taxes but which may be deemed to be a preference item under the federal
alternative minimum tax. Although exempt from regular federal income tax,
interest paid on certain types of municipal obligations, such as private
activity bonds, and the dividends to be paid by each Fund therefrom, may be
deemed to be a preference item under the federal alternative minimum tax and
therefore subject to such tax. Thus, it is possible, although not anticipated,
that up to 20% of each Fund's net assets could be in obligations subject to
regular federal income tax and each Fund's investments could consist entirely of
municipal securities subject to the federal alternative minimum tax. As a
result, dividends that would otherwise be tax-exempt may not be completely
tax-exempt to an investor who is subject to the federal alternative minimum tax
and, therefore, an investment in a Fund may not be appropriate for such an
investor.
In addition, under normal market conditions, each Fund will invest at least 65%
of its total assets in municipal securities which pay interest exempt from
personal income tax in the Fund's respective state, where such state imposes an
income tax. It is possible, although not anticipated, that up to 35% of each
Fund's total assets could be in municipal securities from a state other than the
Fund's named state.
Each Fund may invest, without percentage limitation, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities which are not rated, provided that, in the opinion of the
Fund's investment manager, such securities are comparable in quality to those
within the four highest ratings. Securities rated within the four highest
ratings are considered to be "investment grade" securities, although bonds rated
in the fourth highest rating category, while regarded as having an adequate
capacity to pay principal and interest, are regarded as having greater
vulnerability to adverse economic conditions and some speculative
characteristics. In the event the rating on an issue held in a Fund's portfolio
is lowered by the rating services, such change will be considered by the Fund in
its evaluation of the overall investment merits of that security, but such
change will not necessarily result in an automatic sale of the security. For a
description of municipal securities ratings, see "Appendix B - Description of
Municipal Securities Ratings" in the SAI.
The investment manager considers the terms of an offering and various other
factors in order to determine whether securities are consistent with a Fund's
investment objective and polices and thereafter to determine the issuer's
comparative credit rating. In making such determinations, the investment manager
typically (i) interviews representatives of the issuer at its offices and tours
and inspects the physical facilities of the issuer in an effort to evaluate the
issuer and its operation, (ii) performs analysis of the issuer's financial and
credit position, including comparisons of all appropriate ratios, and (iii)
compares other similar securities offerings to the issuer's proposed offering.
For temporary defensive purposes only, when the investment manager believes that
market conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of a portfolio's value, each Fund may invest (i) more than
20% of its assets (which could be up to 100%) in fixed-income obligations, the
interest on which is subject to regular federal income tax, and (ii) more than
35% of the value of its total assets (which could be up to 100%) in instruments
the interest on which is exempt from regular federal income tax but not the
respective state's personal income tax, where such state imposes an income tax.
Any such temporary taxable investments will be limited to obligations issued or
guaranteed by the full faith and credit of the U.S. government, commercial paper
rated P-1 by Moody's, A-1 by S&P, or F-1+ by Fitch, or obligations of domestic
banks with assets of $1 billion or more.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from regular federal income
tax. All or a portion of the interest on such securities may be deemed to be a
preference item under the federal alternative minimum tax system and thus
subject to the federal alternative minimum tax. An opinion as to the tax-exempt
status of a municipal security is generally rendered to the issuer by the
issuer's bond counsel at the time of issuance of the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that a Fund will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or declining
markets or needs for the projects) may also affect other bonds in the same
segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to pay interest and repay principal. The
Funds have no restrictions on the maturities of municipal securities in which
they may invest. The investment manager will consider each Fund's investment
objective and current market conditions in determining which securities to buy
or hold.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal and state
alternative minimum tax, depending on the shareholder's tax situation. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject a corporate shareholder to, or increase liability under,
the federal alternative minimum tax, because such distributions are included in
the corporation's "adjusted current earnings." In states with a corporate
franchise tax, distributions of a Fund may also be fully taxable to a corporate
shareholder under the state franchise tax system. Consistent with each Fund's
investment objective, a Fund may acquire such private activity bonds if, in the
investment manager's opinion, such bonds represent the most attractive
investment opportunity then available to a Fund. As of May 31, 1995, each Fund
derived the following percentage of its income from bonds, the interest on which
constitutes a preference item subject to the federal alternative minimum tax for
certain investors:
Fund Percentage
Arkansas Fund............... 22.19%
Hawaii Fund................. 41.86%
Tennessee Fund.............. 32.56%
Washington Fund............. 25.56%
Each Fund may invest in variable or floating rate demand notes ("VRDNs"). VRDNs
are tax-exempt obligations which bear interest at rates that are not fixed, but
that vary with changes in prevailing market rates on predesignated dates, and
which carry a demand feature that permits a Fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation, which amount may be more or
less than the amount a Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements. Because of
the demand feature, the prices of VRDNs may be higher and the yields lower than
they otherwise would be for obligations without a demand feature. Each Fund will
limit its purchase of municipal securities that are floating rate and variable
rate obligations to those meeting the quality standards set forth in this
Prospectus.
Each Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
each Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When a Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent a Fund engages in when-issued and delayed delivery transactions, it will
do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
Each Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. COPs are created when long-term lease revenue
obligations are issued by a governmental corporation to pay for the acquisition
of property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the obligations issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs may enable a governmental
issuer to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COPs financing, the Funds
believe that this risk is mitigated by their policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed by the investment manager to be of comparable quality.
Criteria considered by the rating agencies and the investment manager in
assessing such risk include the issuing municipality's credit rating, an
evaluation of how essential the leased property is to the municipality and the
term of the lease compared to the useful life of the leased property. The Board
reviews the COPs held in each Fund's portfolio to assure that they constitute
liquid investments based on various factors reviewed by the investment manager
and monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated or, if unrated, comply with
existing criteria and procedures followed to ensure that they are of comparable
quality to the rating required for a Fund's investment, including an assessment
of the likelihood that the leases will not be canceled; (b) the size of the
municipal securities market, both in general and with respect to COPs; and (c)
the extent to which the type of COPs held by a Fund trade on the same basis and
with the same degree of dealer participation as other municipal bonds of
comparable credit rating or quality. While there is no limit as to the amount of
assets which each Fund may invest in COPs, as of May 31, 1995, the Tennessee
Fund held 5.52% of its total net assets in COPS and other municipal leases. None
of the other Funds held more than five percent of their total net assets in COPs
and other municipal leases.
Each Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price, which typically reflects a premium
over the bonds' original issue price. These bonds generally have call-protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for five to ten years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Funds, depending on the price at which such bonds were redeemed.
Other Policies
Each Fund may (i) borrow from banks for temporary or emergency purposes up to 5%
of its total assets and pledge up to 5% of its total assets in connection
therewith and (ii) lend up to 10% of its portfolio securities to qualified
securities dealers or other institutional investors. These restrictions have
been adopted as fundamental policies of each Fund and may not be changed without
the approval of a majority of the outstanding voting securities of each Fund.
Although each Fund may lend up to 10% of its assets, each Fund currently intends
to limit its lending of securities to no more than 5% of its total assets.
Each Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
Investment Risk Considerations
While an investment in any of the Funds is not without risk, certain policies
are followed in managing the Funds which may help to reduce the investor's risk.
There are two categories of risks to which a Fund is subject: credit risk and
market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions generally affecting the market as a whole. A
municipal security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which a Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of a Fund's debt instruments may rise. Price changes of securities held by
a Fund have a direct impact on the net asset value per share of that Fund. Since
each Fund primarily invests in the securities of its respective state, there are
certain specific factors and considerations concerning each state which may
affect the credit and market risk of the municipal securities that each Fund may
purchase. See "Special Factors Affecting Each Fund" and the SAI for a discussion
of these factors.
As non-diversified investment companies, the Funds are not subject to any
statutory restriction under the 1940 Act with respect to the percentage of their
assets which may be invested in the securities of one or more issuers. Each
Fund, however, intends to comply with the asset diversification, income,
distribution and other requirements of the Code applicable to regulated
investment companies so that it will not be subject to federal income tax and
distributions to shareholders will be free from regular federal income tax to
the extent that they are derived from municipal securities. Accordingly, each
Fund will not purchase a security if, as a result, more than 25% of its total
assets would be invested in the securities of a single issuer, or with respect
to 50% of its total assets, more than 5% of such assets would be invested in the
securities of a single issuer. To the extent a Fund is not fully diversified, it
may be more susceptible to adverse economic, political or regulatory
developments affecting a single issuer than would be the case if the Fund were
more broadly diversified.
Conversion to Master/Feeder Fund Structure
Currently, in seeking to accomplish its objective of providing investors with as
high a level of income exempt from regular federal income taxes as is consistent
with prudent investing, while seeking preservation of shareholders' capital and
a maximum level of income which is exempt from the state personal income taxes
(if any) for resident shareholders of each such state, each Fund invests
directly in a portfolio of municipal securities. Certain funds administered by
the investment manager participate as feeder funds in master/feeder fund
structures. Under a master/feeder structure, one or more feeder funds invest
their assets in a master fund, which, in turn, invests its assets directly in
securities. Each Fund hereby reserves the right to convert to a master/feeder
fund structure
at a future date. Various state governments have adopted the North American
Securities Administrators Association Guidelines for registration of
master/feeder funds. If required by those guidelines, as then in effect, the
Trust, on behalf of each Fund, will seek shareholder approval prior to
converting a Fund to the master/feeder structure, subject to there not being
adopted a provision or ruling under federal law which removes the requirement
for shareholder approval. If it is determined by the requisite regulatory
authorities that such approval is not required, shareholders will be deemed to
have consented to such conversion by their purchase of Fund shares and no
further shareholder approval will be sought or needed. Shareholders will,
however, be informed in writing in advance of the conversion. A determination to
convert a Fund to a master/feeder structure would not be expected to result in
an increase in the level of fees or expenses paid by a Fund or its shareholders.
The investment objective and other fundamental policies of each Fund, which can
be changed only with shareholder approval, are structured so as to permit each
Fund to invest directly in securities or indirectly in securities through a
master/feeder fund structure.
How Shareholders Participate in
the Results of Each Fund's Activities
The assets of each Fund are invested in portfolio securities. If the securities
owned by a Fund increase in value, the value of the shares of the Fund which the
shareholder owns will increase. If the securities owned by a Fund decrease in
value, the value of the shareholder's shares in that Fund will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by a Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of a Fund's shares will fluctuate with movements in the broader bond markets as
well. In particular, changes in interest rates will affect the value of a Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of a Fund's shares. History reflects both increases
and decreases in the prevailing rate of interest and these may reoccur
unpredictably in the future.
Management of the Trust
The Board has the primary responsibility for the overall management of the Trust
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (115 separate series) with aggregate assets of over $77 billion,
approximately $40 billion of which are in the municipal securities market.
Pursuant to a management agreement, the Manager supervises and implements each
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct each Fund's business.
During the fiscal year ended May 31, 1995, management fees, before any advance
waiver, totaled 0.63% of the average daily net assets of the Hawaii Fund and
0.62% of the average daily net assets of the Arkansas, Tennessee and Washington
Funds. Total operating expenses, including management fees before any advance
waiver, totaled 1.11%, 0.87%, 0.92% and 1.05% of the average daily net assets of
the Arkansas, Hawaii, Tennessee and Washington Funds, respectively. Pursuant to
an agreement by Advisers to waive its fees, the Funds paid no management fees
and paid operating expenses totaling 0.10%, 0.20%, 0.10% and 0.10% of the
average daily net assets of the Arkansas, Hawaii, Tennessee and Washington
Funds, respectively.
It is not anticipated that any of the Funds will incur a significant amount of
brokerage expenses because municipal securities are generally traded in
principal transactions which involve the receipt by the broker of a spread
between the bid and ask prices for the securities, and not the receipt of
commissions. In the event that a Fund participates in transactions involving
brokerage commissions, it is the Manager's responsibility to select brokers
through whom such transactions will be effected. The Manager will try to obtain
the best execution on all such transactions. If it is felt that more than one
broker is able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
a Fund, as factors in selecting a broker. Further information is included under
"The Trust's Policies Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions for the Funds are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plans of Distribution
Each Fund has adopted a plan of distribution (the "Plans") pursuant to Rule
12b-1 under the 1940 Act. Under the Plans, each Fund may reimburse Distributors
or others for all expenses incurred by Distributors or others in the promotion
and distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Hawaii
Fund may pay to Distributors or others for such distribution expenses is 0.10%
per annum of the average daily net assets of the Hawaii Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.10%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Hawaii Fund. The maximum amount which the
Arkansas, Tennessee and Washington Funds may pay to Distributors or others for
such distribution expenses is 0.15% per annum of the average daily net assets of
each such Fund, payable on a quarterly basis. All expenses of distribution and
marketing in excess of 0.15% per annum will be borne by Distributors, or others
who have incurred them, without reimbursement from the Arkansas, Tennessee and
Washington Funds. The Plans also cover any payments to or by a Fund, Advisers,
Distributors, or other parties on behalf of a Fund, Advisers or Distributors, to
the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by a Fund within the
context of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each Fund. For more information, please
see the SAI.
Distributions to Shareholders
There are two types of distributions which each Fund may make to its
shareholders:
1. Income dividends. Each Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. Each Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by each Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. Each Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, each Fund's current policy is to declare income dividends daily
and pay them monthly on or about the last business day of that month. The amount
of income dividend payments by each Fund is dependent upon the amount of net
income received by the Fund from its portfolio holdings, is not guaranteed and
is subject to the discretion of the Board. Fund shares are quoted ex-dividend on
the first business day following the record date. The Funds do not pay
"interest" or guarantee any fixed rate of return on an investment in their
shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds. Shareholders have the right
to change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the reinvestment date is seven or more business days
after such Fund has been notified. See the SAI for more information.
Many of each Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Funds, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department.
Taxation of the Funds
and Their Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Funds and their shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
All series of the Trust are treated as separate entities for federal and state
income tax purposes. Each Fund intends to continue to qualify for treatment as a
regulated investment company under Subchapter M of the Code. By distributing all
of its income and meeting certain other requirements relating to the sources of
its income and diversification of its assets, a Fund will not be liable for
federal income or excise taxes. By meeting certain requirements of the Code, the
Funds have qualified and continue to qualify to pay exempt-interest dividends to
shareholders. Such exempt-interest dividends are derived from interest income
exempt from regular federal income tax and are not subject to regular federal
income tax for Fund shareholders.
Arkansas Taxes - The Arkansas Fund has received a ruling from the Arkansas
Department of Revenue and Finance dated January 25, 1994, to the effect that
distributions from the Arkansas Fund that are attributable to (1) interest from
obligations of the state of Arkansas or its political subdivisions, and (2)
interest derived from obligations of the United States government or its
territories and possessions will not be taxable to shareholders for purposes of
the Arkansas personal income tax. All other dividends paid by the Arkansas Fund
will be subject to the Arkansas personal income tax. The Fund has also received
a ruling to the effect that distributions paid by the Arkansas Fund from that
Fund's long-term capital gains and designated as capital gain dividends will be
treated as long-term capital gains in the hands of Arkansas Fund shareholders
subject to Arkansas personal income tax.
Hawaii Taxes - To the extent that exempt-interest dividends paid by the Hawaii
Fund are derived from interest on obligations of Hawaii or its political
subdivisions, from interest on direct obligations of the federal government, or
from interest on obligations of Puerto Rico, the U.S. Virgin Islands, Guam or
the District of Columbia, they will be exempt from personal income tax in
Hawaii.
Tennessee Taxes - Under existing Tennessee law, as long as the Tennessee Fund
qualifies as a regulated investment company under the Code, distributions from
the Tennessee Fund will not be subject to the Tennessee stock and bond income
tax, also known as the Hall Income Tax, to the extent that such distributions
are attributable to interest on (i) bonds or securities of the United States
government or any agency or instrumentality thereof, or (ii) bonds of the state
of Tennessee or any county, municipality, or political subdivision thereof,
including any agency, board, authority, or commission. Other distributions from
the Tennessee Fund, including dividends attributable to obligations of issuers
in states other than Tennessee and capital gain dividends, will be fully taxable
for purposes of the Tennessee stock and bond income tax.
To the extent dividends paid by a Fund are derived from taxable income from
temporary investments (including the discount from certain stripped obligations
or their coupons or income from securities loans or other taxable transactions),
from the excess of net short-term capital gain over net long-term capital loss,
or from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
for federal income tax purposes whether the shareholder has elected to receive
them in cash or in additional shares.
From time to time, a Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond was issued with original issue discount and such market discount exceeds a
de minimis amount under the Code. For such obligations purchased after April 30,
1993, a portion of the gain on sale or disposition (not to exceed the accrued
portion of market discount as of the time of sale or disposition) is treated as
ordinary income rather than capital gain. Any distribution by a Fund of such
ordinary income to its shareholders will be subject to regular federal and state
income taxes in the hands of Fund shareholders. In any fiscal year, a Fund may
elect not to distribute to its shareholders its taxable ordinary income and,
instead, to pay federal income or excise taxes on this income at the Fund level.
The amount of such distributions, if any, is expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if received by the shareholder on December 31 of the calendar year in which they
are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned shares of a Fund and regardless of
whether such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of a Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares and will be disallowed to the extent of exempt-interest
dividends paid with respect to such shares.
Each Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or a tax
preference item under the federal alternative minimum tax. Shareholders who have
not held shares of a Fund for a full calendar year may have designated as
tax-exempt or as tax preference income a percentage of income which is not equal
to the actual amount of tax-exempt or tax preference income earned during the
period of their investment in a Fund.
Exempt-interest dividends of a Fund, although exempt from regular federal income
tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest dividends on their
federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares may not be fully deductible for federal income tax
purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from a Fund
and the application of foreign tax laws to these distributions.
The foregoing description relates solely to federal income tax law and to
Arkansas, Hawaii and Tennessee income tax treatment to the extent indicated.
Shareholders should consult their tax advisors with respect to the applicability
of other state and local income taxes to their shares in a Fund and to
distributions and redemption proceeds received from a Fund. Corporate,
individual and trust shareholders should contact their tax advisors to determine
the impact of Fund dividends and capital gain distributions under the
alternative minimum tax that may be applicable to a shareholder's particular tax
situation.
How to Buy Shares of Each Fund
Shares of each Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Funds'
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment in each Fund is $100 and
subsequent investments must be $25 or more. These minimums may be waived when
the shares are purchased through plans established by the Franklin Templeton
Group. The Trust and Distributors reserve the right to refuse any order for the
purchase of shares. The Funds currently do not permit investment by market
timing or allocation services ("Timing Accounts"), which generally include
accounts administered so as to redeem or purchase shares based upon certain
predetermined market indicators.
Purchase Price of Shares of Each Fund
Shares of each Fund are offered at their public offering price, which is
determined by adding the net asset value per share plus a front-end sales
charge, next computed (1) after the shareholder's securities dealer receives the
order which is promptly transmitted to the Fund or (2) after receipt of an order
by mail from the shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a negotiable check). The sales
charge is a variable percentage of the offering price depending upon the amount
of the sale. The offering price will be calculated to two decimal places using
standard rounding criteria. A description of the method of calculating net asset
value per share is included under the caption "Valuation of Shares of Each
Fund."
Set forth below is a table showing front-end sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of Each Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds,
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction), and (c) the U.S.
registered mutual funds in the Templeton Group of Funds except Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton
Funds are collectively referred to as the "Franklin Templeton Funds.") Sales
charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1% of the amount purchased
to securities dealers who initiate and are responsible for purchases made at net
asset value by certain trust companies and trust departments of banks. See
"Description of Special Net Asset Value Purchases" and the SAI.
Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of a Fund's shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory agency, such
as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Funds or their
shareholders.
Additional terms concerning the offering of a Fund's shares are included in the
SAI.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of a Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of a
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements and income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more information, see "Additional
Information Regarding Fund Shares" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases
An individual who is a member of a qualified group may also purchase shares of
each Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.50%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of a Fund or Distributors and the members, agree to include
sales and other materials related to the Funds in its publications and mailings
to members at reduced or no cost to Distributors and seek to arrange for payroll
deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in such Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of each Fund may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors and full-time employees of the Funds, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) registered securities dealers and
their affiliates, for their investment account only; and (5) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of each Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of a Fund or Class I shares
of another of the Franklin Templeton Funds which were purchased with a front-end
sales charge or assessed a contingent deferred sales charge on redemption. If a
different class of shares is purchased, the full front-end sales charge must be
paid at the time of purchase of the new shares. Under this privilege, an
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the shares
redeemed and subsequently repurchased, a new contingency period will begin.
Shares redeemed in connection with an exchange into another of the Franklin
Templeton Funds (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of a Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 365 days after the redemption. The 365 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same fund
is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Shares of each Fund or Class I shares of another of the Franklin Templeton Funds
may be purchased at net asset value and without a contingent deferred sales
charge by persons who have received dividends and capital gains distributions in
cash from investments in a Fund within 365 days of the payment date of such
distribution. Class II shareholders may also invest such distributions at net
asset value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of each Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge and which has investment objectives
similar to those of a Fund.
Shares of each Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Shares of each Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof, which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into a
Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of each Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in a Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.
Refer to the SAI for further information regarding net asset value purchases.
General
Securities laws of states in which each Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from a Fund to shareholders whose shares are held, of record,
by a financial institution or in a "street name" account or networked account
through the National Securities Clearing Corporation ("NSCC") (see the section
captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of a Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealer or from Distributors.
The market value of each Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by a Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of a Fund would be disadvantageous because of the sales charge
on the additional purchases. Also, redemptions of shares may be subject to a
contingent deferred sales charge if the shares are redeemed within 12 months of
the calendar month of the original purchase date. The shareholder should
ordinarily not make additional investments of less than $5,000 or three times
the annual withdrawals under the plan during the time such a plan is in effect.
The applicable contingent deferred sales charge is waived for share redemptions
of up to 1% monthly of an account's net asset value (12% annually, 6%
semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge. Any amount over that $120,000 would
be assessed a 1% contingent deferred sales charge. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or a Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment, by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, a Fund's shares may be
exchanged for Class I shares of other Franklin Templeton Funds which are
eligible for sale in the shareholder's state of residence and in conformity with
such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectus of the fund they wish
to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges. No exchanges between
different classes of shares are allowed and, therefore, shares of a Fund may not
be exchanged for Class II shares of other Franklin Templeton Funds. Shareholders
may choose to redeem shares of a Fund and purchase Class II shares of other
Franklin Templeton Funds but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges for the contingency period of
18 months. Although there are no exchanges between different classes of shares,
shareholders of a Class II Franklin Templeton Fund may, however, elect to direct
their dividends and capital gain distributions to a Fund at net asset value.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of a Fund by telephone by calling Investor Services at 1-800/632-2301 or
the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from a
Fund into an identically registered account in Class I shares of one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in the shareholder's account. The Funds and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Please refer to "Telephone Transactions - Verification
Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of each Fund's shares,
Investor Services will accept exchange orders from securities dealers who
execute a dealer or similar agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be effective only for
uncertificated shares on deposit in the shareholder's account or for which
certificates have previously been deposited. A securities dealer may charge a
fee for handling an exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed will be tolled (or stopped) for the period such shares
are exchanged into and held in a Franklin or Templeton money market fund. See
also "How to Sell Shares of Each Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of a Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid originated from a fund on which the investor paid
or was subject to a front-end or contingent deferred sales charge. Exchanges of
shares of a Fund which were purchased with a lower sales charge to a fund which
has a higher sales charge will be charged the difference, unless the shares were
held in the Fund for at least six months prior to executing the exchange. When
an investor requests the exchange of the total value of the Fund account,
accrued but unpaid income dividends and capital gain distributions will be
reinvested in the Fund at the net asset value on the date of the exchange, and
then the entire share balance will be exchanged into the new fund in accordance
with the procedures set forth above. Because the exchange is considered a
redemption and purchase of shares, the shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and information reporting
may also apply. Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and in the SAI.
If a substantial portion of a Fund's shareholders should, within a short period,
elect to redeem their shares of the Fund pursuant to the exchange privilege, the
Fund might have to liquidate 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 should occur, it is the general policy of the Funds to initially
invest this money in short-term, interest-bearing municipal securities, unless
it is felt that attractive investment opportunities consistent with a Fund's
investment objective exist immediately. Subsequently, this money will be
withdrawn from such short-term municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The exchange privilege may be modified or discontinued by each Fund at any time
upon 60 days' written notice to shareholders.
The Funds currently will not accept investments from Timing Accounts.
How to Sell Shares of Each Fund
A shareholder may at any time liquidate shares owned and receive from a Fund the
value of the shares. Shares may be redeemed in any of the following ways:
Redemptions By Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated (at the
scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signatures guaranteed as referenced above. Shareholders are
advised, for their own protection, to send the share certificate and assignment
form in separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions By Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of a Fund by telephone. Information may also be obtained by
writing to a Fund or Investor Services at the address shown on the cover or by
calling 1-800/632-2301. The Funds and Investor Services will employ reasonable
procedures to confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with a Fund
or Investor Services may be made for up to $50,000 per day per Fund account.
Telephone redemption requests received before the scheduled closing of the
Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust departments
and government entities which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) which wish to execute redemptions in
excess of $50,000 must complete an Institutional Telephone Privileges Agreement,
which is available from the Franklin Templeton Institutional Services Department
by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
Each Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions By Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The SAI contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, investments of $1
million or more redeemed within the contingency period of 12 months of the
calendar month of their purchase will be assessed a contingent deferred sales
charge, unless one of the exceptions described below applies. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; (iii) other shares held longer than the contingency period;
and followed by (iv) any shares held less than the contingency period, on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived for: exchanges; any account fees;
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually); redemptions initiated by a Fund due to a
shareholder's account falling below the minimum specified account size; and
redemptions following the death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
A Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither a Fund
nor its affiliates will be liable for any loss to the shareholder caused by the
shareholder's failure to cash such checks.
"Cash" payments to or from a Fund may be made by check, draft or wire. The Funds
have no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of each Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer Fund shares in one account to another identically registered
account in the Fund, (iv) request the issuance of certificates, to be sent to
the address of record only, and (v) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Agreement, as described under "How to Sell Shares of Each Fund - Redemptions By
Telephone," will be able to redeem shares of a Fund.
Verification Procedures
Each Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither a Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Shares of Each Fund
The net asset value per share of each Fund is determined as of the scheduled
closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of each Fund).
The net asset value per share of each Fund is determined in the following
manner: The aggregate of all liabilities is deducted from the aggregate gross
value of all assets, and the difference is divided by the number of shares of
the Fund outstanding at the time. For the purpose of determining the aggregate
net assets of each Fund, cash and receivables are valued at their realizable
amounts and interest is recorded as accrued. Portfolio securities for which
market quotations are readily available are valued within the range of the most
recent bid and ask prices as obtained from one or more dealers that make markets
in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. 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 trustees, a Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions.
How to Get Information Regarding an Investment in Each Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders
may obtain account information, current price and, if available, yield or other
performance information specific to each Fund or any Franklin Templeton Fund. In
addition, Franklin Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements, money fund checks, if applicable, and
deposit slips.
Information about each Fund may be accessed by entering a Fund's Code followed
by the # sign. The Funds' Codes are 221 for the Arkansas Fund, 173 for the
Hawaii Fund, 220 for the Tennessee Fund, and 176 for the Washington Fund. The
system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation. The same numbers may be used when
calling from a rotary phone.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton's
service departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of each Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect each Fund's volatility or risk.
Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
Each Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by each Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC (see the SAI), are not indicative of the dividends
or distributions which were or will be paid to a Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate, which may be quoted to
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after-tax
distribution rate equivalent to the Fund's distribution rate (calculated as
indicated above). Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of each Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
each Fund's yield, tax equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period.
General Information
Reports to Shareholders
The Trust's fiscal year ends May 31. Annual Reports containing audited financial
statements of the Trust, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to
shareholders. To reduce the volume of mail sent to one household, as well as to
reduce each Fund's expenses, Investor Services will attempt to identify related
shareholders within a household and send only one copy of the report. Additional
copies may be obtained, without charge, upon request to the Trust at the
telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Delaware business trust on November 19, 1991. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest with a par value of
$.01, which may be issued in any number of series and classes. Shares issued
will be fully paid and non-assessable and will have no preemptive, conversion,
or sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions, as declared by such series, and the net assets of
such series upon liquidation or dissolution. The Trust reserves the right to
issue additional classes of shares of each Fund or to add additional series to
the Trust.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees,
the holders of more than 50% of the shares of the Trust voting can elect all of
the trustees, if they choose to do so, and in such event the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board. The Trust does not intend to hold annual shareholders meetings. The Trust
may, however, hold a special shareholders meeting of a series for such purposes
as changing fundamental investment restrictions for the series, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees in
their discretion or by shareholders holding at least ten percent of the
outstanding shares of any series entitled to vote at the meeting. Shareholders
will receive assistance in communicating with other shareholders in connection
with the election or removal of trustees such as that provided in Section 16(c)
of the 1940 Act.
Redemptions by Each Fund
Each Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder.
More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in a Fund carried in
"street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
Each Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by a Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, a Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Funds' portfolios.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is the Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986. He received a Bachelor of Arts degree in Business and
Economics from the University of California at Santa Barbara and a Master of
Science degree in Finance from Golden Gate University. He is a member of several
municipal securities industry related committees and associations.
Robert Schubert
Portfolio Manager of Advisers
Mr. Schubert attended Fairleigh Dickenson University, Rutherford, New Jersey,
and has been in the securities industry since 1960. Mr. Schubert has been with
the Franklin Templeton Group since 1989, initially managing two tax-exempt bond
funds and the equity trading desk at Templeton in Florida. He moved to Franklin
in California in 1994.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy joined Advisers in 1986. He received a Bachelor of Arts degree in
Business Administration from San Francisco State University in 1986 and is a
member of industry related committees and associations.
Special Factors Affecting Each Fund
The following information is a brief summary of factors affecting each Fund's
respective state and does not purport to be a complete description of such
factors. The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of the respective states,
from independent municipal credit reports and historically reliable sources, but
it has not been independently verified by the Trust. Additional information
regarding each state is included in the SAI.
Arkansas
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing, although agriculture remains a significant
component of the state's economy and income. The state's manufacturing industry
reflects the agriculture and forest resources of the state, with the largest
manufacturing industries being food products, electrical products and
appliances, and lumber and paper goods. Arkansas' manufacturing sector is now
its largest employer, representing approximately 25% of the work force, although
significant gains have also been made in the wholesale and retail trade
industries which now account for 23% of the work force. As a result of the shift
towards manufacturing, the state's economy is more diversified and less
sensitive to cyclical changes in any one economic sector.
During 1994, Arkansas experienced strong employment growth, ranking twelfth
among the states at 3.2% versus 2.6% for the country as a whole. This growth is
expected to continue through 1995, especially in the services sector where
growth is expected to offset a small decline in manufacturing. Population
growth, fueled by the state's manufacturing economy and its attraction to
retirees, should result in an increase in the state's construction industry,
which is forecast to be the state's fastest growing industry over the next two
years.
Despite its growth, Arkansas continues to be one of the poorest states, ranking
49th in personal income per capita. Growth in per capita income, however, has
consistently exceeded the national average during recent years.
Hawaii
Hawaii's economy is tied to the economies of California and Japan, which are the
origins of many Hawaiian visitors and which are slowly recovering from recent
economic recessions. The state's historically strong tourism industry, which
dominates its economy and which declined during the three years from 1991 to
1993, has begun to rebound. The number of visitors for the first eleven months
of 1994 was up 4.9% from the same period in 1993, although still below the
state's peak in 1990. The improvement in the tourism industry has been primarily
the result of an improved U.S. economy, especially in California.
Corporate layoffs, a decline in the construction industry, and the movement of
agricultural operations out of Hawaii to less expensive locations have slowed
the state's employment growth. In February 1995, nonagricultural jobs rose 0.3%
from the same time a year ago, while total employment declined. The state's
unemployment also declined in February to 5.1%, which compares favorably to the
nation's unemployment rate of 5.9%. Despite the reduction in unemployment, the
struggling construction and agriculture industries continue to exert pressure on
the state's historically strong financial position, which has been reduced as
growth and tax revenues have slowed.
Tennessee
The Tennessee economy has outpaced the nation for the last five years, due to
the expansion of its services sector, improved financial operations and low
debt. Historically, the Tennessee economy has been characterized by a greater
concentration in manufacturing employment than the United States as a whole.
Although the rate of growth in manufacturing jobs has leveled off since the
early 1980s, the growth that has occurred has been primarily in the
transportation equipment sector, as evidenced by the expansion of the Saturn and
Nissan automotive facilities and related suppliers. The new manufacturing jobs
have tended to be well paying and have led to improved wealth and per capita
income levels.
Diversification within the manufacturing sector into durable products, as well
as the overall diversification of the state's economy into the service sector,
contributed to a measure of insulation of the state's economy from the most
recent national recession. Per capita personal income ranks 31st in the nation.
Currently, services account for 24%, and trade and manufacturing each account
for approximately 23% of the state's nonagricultural employment. Within the
service sector, health care and product distribution services are taking a
leading role.
Federal Express is now the largest employer in the state.
Employment gains have outpaced the U.S. over the last 12 years with an increase
of 32% in Tennessee as compared to 22% for the country as a whole. Unemployment
rates have been at or below the national average since 1988.
Washington
The recession hit the state of Washington later than the rest of the nation.
Strong personal income and employment growth experienced by the state during the
1980s (characterized by a 26% increase in the civilian labor force) continued
through 1990. Some economic softening emerged in the first quarter of 1991 as
the trade and construction areas turned downward. Employment growth subsequently
resumed and employment levels surpassed their pre-recession peak by the end of
1992. During 1994, the state's economy outperformed expectations due to higher
than expected employment and personal income growth. The state's per capita debt
is moderate at $1,204.
The state's economy continues to diversify. Looking ahead, state financial
performance is anticipated to remain positive despite announced reductions in
operations at Boeing, whose employees represent about 4% of the state's
employment. Boeing has reduced its Washington work force by 30,000 during the
last five years and additional reductions are expected. Other sectors of the
state's economy are strong and are adding jobs at rates that more than offset
the contraction in the aerospace industry. Employment levels rose 9.8% during
the last five years despite the reductions in the aerospace industry.
FRANKLIN
MUNICIPAL
SECURITIES TRUST
Franklin Arkansas Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 OCTOBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
About the Trust.................................. 2
Each Fund's Investment Objective
and Policies.................................... 2
Description of Municipal and
Other Securities................................ 3
Investment Restrictions.......................... 5
Trustees and Officers............................ 6
Investment Advisory and Other Services........... 9
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions.......... 10
Additional Information
Regarding Fund Shares........................... 11
The Trust's Underwriter.......................... 14
Additional Information Regarding Taxation........ 16
General Information.............................. 17
Miscellaneous Information........................ 20
Ownership and Authority Disputes................. 22
Appendix A - Further Information on
Special Factors Affecting Each State Fund....... 22
Appendix B - Description of Municipal
Securities Ratings.............................. 25
Financial Statements............................. 27
Franklin Municipal Securities Trust (the "Trust") is an open-end management
investment company consisting of five separate, non-diversified series: Franklin
Arkansas Municipal Bond Fund (the "Arkansas Fund"), Franklin California High
Yield Municipal Fund (the "California Fund"), Franklin Hawaii Municipal Bond
Fund (the "Hawaii Fund"), Franklin Tennessee Municipal Bond Fund (the "Tennessee
Fund") and Franklin Washington Municipal Bond Fund (the "Washington Fund"), each
of which may be referred to collectively or separately as the "Funds" or "Fund."
Each Fund seeks to provide investors with as high a level of income exempt from
regular federal income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The Arkansas, California, Hawaii
and Tennessee Funds also seek to provide a maximum level of income which is
exempt from state personal income taxes for resident shareholders of each such
state. The state of Washington currently imposes no state income tax. As a
secondary objective the California Fund will seek capital appreciation to the
extent this is possible and is consistent with its principal investment
objective.
Each Fund seeks to accomplish its objective by investing primarily in municipal
securities issued by its respective state and the state's political
subdivisions, agencies and instrumentalities which pay interest exempt such
state's personal income taxes (if any) and regular federal income taxes.
Each Fund's (except the California Fund) investments in municipal securities
will be limited to such investments rated in one of the four highest ratings
categories by a recognized ratings agency or in securities which are not rated,
but deemed to be comparable in quality. In addition to its ability to invest in
higher rated municipal securities, the California High Yield Fund may invest,
without percentage limitation, in lower rated or unrated but deemed to be
comparable in quality municipal securities.
Prospectuses for the Funds dated October 1, 1995, as may be amended from time to
time, provide the basic information a prospective investor should know before
investing in a Fund and may be obtained without charge from the Trust or from
its principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectuses. This SAI is intended to provide an investor with additional
information regarding the activities and operations of the Trust and each Fund,
and should be read in conjunction with the Prospectuses.
About the Trust
The Trust is an open-end management investment company, commonly called a
"mutual fund." The Trust was organized in November 1991 as a Delaware business
trust. The Trust issues shares of beneficial interest with a par value of $0.01
per share. The Trust currently consists of five non-diversified series, but may
in the future issue additional series, each of which maintains a totally
separate investment portfolio.
Each Fund's Investment
Objective and Policies
As noted in the relevant prospectus, each Fund attempts to invest 100% and, as a
matter of fundamental policy, invests at least 80% of the value of its net
assets in municipal securities, the interest on which is exempt from regular
federal income taxes, but which may be deemed to be a preference item under the
federal alternative minimum tax. It is also the policy of each Fund to invest at
least 65% of its total assets in bonds which pay interest that is exempt from
personal income tax in its respective state, where such state imposes an income
tax. Interest paid on certain types of municipal obligations, such as "private
activity bonds," and the dividends to be paid by each Fund therefrom, although
exempt from regular federal income tax, may be deemed to be a preference item
under the federal alternative minimum tax, and thus subject to the federal
alternative minimum tax.
Thus, it is possible, although not anticipated, that up to 20% of each Fund's
net assets could be in obligations subject to regular federal taxation and/or up
to 35% of each Fund's total assets could be in municipal securities from other
states. In addition, it is possible that each Fund's investments could consist
entirely of bonds, the interest on which is subject to the federal alternative
minimum tax.
The Arkansas, Hawaii, Tennessee and Washington Funds may invest, without
percentage limitation, in securities having at the time of purchase one of the
four highest ratings of Moody's Investors Service ("Moody's") (Aaa, Aa, A, Baa),
Standard & Poor's Corporation ("S&P") (AAA, AA, A, BBB), Fitch Investors
Service, Inc. ("Fitch") (AAA, AA, A, BBB), or in securities which are not rated,
provided that, in the opinion of the Fund's investment manager, Franklin
Advisers, Inc. ("Advisers" or "Manager"), such securities are comparable in
quality to those within the four highest ratings. These are considered to be
"investment grade" securities, although bonds rated in the fourth highest rating
category by the foregoing rating services are regarded as having an adequate
capacity to pay principal and interest but with greater vulnerability to adverse
economic conditions and to have some speculative characteristics. In addition,
the California High Yield Fund may invest, without percentage limitation, in
lower rated securities and may invest up to 5% of its assets (at the time of
purchase) in defaulted securities. Risk considerations of investments in lower
rated bonds are described in the Prospectus for the California Fund. A
description of the ratings is included in Appendix B to this SAI.
Although each Fund seeks to invest all its assets in a manner designed to
accomplish its objectives, there may be times where market conditions limit the
availability of appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. Accordingly, for
temporary defensive purposes, each Fund may invest more than 20% and up to 100%
of its total assets in taxable, fixed-income obligations, and each Fund may
invest more than 35% and up to 100% of the value of its total assets in
instruments, the interest on which is exempt from regular federal income taxes,
but not the respective state's personal income tax, where such state imposes an
income tax.
It is the policy of each Fund that illiquid securities (a term which means
securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund.
Description of Municipal
and Other Securities
Each Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which each Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power for the payment of
principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They are usually general obligations of the issuer. Bond Anticipation
Notes are normally issued to provide interim financing until long-term financing
can be arranged. The long-term bonds then provide the money for the repayment of
the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund, from
which money may be used to make principal and interest payments on the issuer's
obligations. 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. Some authorities are provided with further security in the form of
state assurance (although without obligation) to make up deficiencies in the
debt service reserve fund.
Industrial Development Bonds. These are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money for the financing of
various privately-operated facilities for business manufacturing, housing,
sports, and pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds is solely dependent on the
ability of the facilities user to meet its financial obligations and the pledge,
if any, of the real and personal property so financed as security for such
payment.
Variable or Floating Rate Demand Notes ("VRDNs"). These are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period (generally up to 30
days) prior to specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily up
to monthly, and are calculated to maintain the market value of the VRDN at
approximately its par value upon the adjustment date.
Zero Coupon Securities. A Fund's investment in zero coupon and delayed interest
bonds may cause a Fund to recognize income and make distributions to
shareholders prior to the receipt of cash payments. Zero-coupon securities make
no periodic interest payments but instead are sold at a deep discount from their
face value. The buyer receives a rate of return determined by the gradual
appreciation of the security, which is redeemed at face value on a specific
maturity date.
Because zero-coupon securities bear no interest and compound semi-annually at
the rate fixed at the time of issuance, the value of such securities is
generally more volatile than other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zeros fall more dramatically than
bonds paying interest on a current basis when interest rates rise. When interest
rates fall, zero-coupon securities rise more rapidly in value, because the bonds
reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements, a Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
When-Issued Purchases. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place after the date that the offer is
accepted. The purchase price and the yield that will be received on the
securities are each fixed at the time the buyer enters into the commitment.
While the Trust will always make commitments to purchase such securities with
the intention of actually acquiring the securities, it may nevertheless sell
these securities before the settlement date if it is deemed advisable as a
matter of investment strategy. To the extent that assets of a Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to the policies stated in the Prospectus. At the time
the Trust makes the commitment to purchase a municipal bond on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining each Fund's net asset value. The Trust does not believe that each
Fund's net asset value or income will be adversely affected by the purchase of
municipal bonds on a when-issued basis. Each Fund will establish a segregated
account, in which it will maintain cash and marketable securities equal in value
to commitments for when-issued securities.
Escrow secured bonds or defeased bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade interest
bearing debt securities which are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
AAA rating from S&P and Moody's.
The Funds may invest in all types of U.S. government securities including: (1)
U.S. Treasury obligations with varying interest rates, maturities and dates of
issuance, such as U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (original maturities of one to ten years) and U.S. Treasury bonds
(generally original maturities of greater than ten years); and (2) obligations
issued or guaranteed by U.S. government agencies and instrumentalities, such as
GNMA, the Export-Import Bank and the Farmers Home Administration. Some of the
Fund's investments will include obligations which are supported by the full
faith and credit pledge of the U.S. government. In the case of U.S. government
obligations which are not backed by the full faith and credit pledge of the U.S.
government (e.g., obligations of FNMA and a Federal Home Loan Bank), a Fund must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities and
in which each Fund may invest so long as they are consistent with the Fund's
investment objective and policies.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, each Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of the Fund's
total assets at the time of the most recent loan. The borrower must deposit with
the Fund's custodian bank collateral with an initial market value of at least
102% of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. Such
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. A Fund engages in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
the cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
Portfolio Turnover. Each Fund expects that its portfolio turnover rate will
generally not exceed 100%, but this rate should not be construed as a limiting
factor.
Investment Restrictions
The Trust has adopted the following restrictions as additional fundamental
policies of each Fund. These policies may not be changed with respect to any
Fund without the approval of a majority of the outstanding voting securities of
such Fund. Under the Investment Company Act of 1940 (the "1940 Act"), a "vote of
a majority of the outstanding voting securities" of the Trust or of a particular
Fund means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Trust or of such Fund or (2) 67% or more of the shares
of the Trust or of such Fund present at a shareholders meeting if more than 50%
of the outstanding shares of the Trust or of such Fund are represented at the
meeting in person or by proxy. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowing
(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 by engaging in repurchase transactions and except through
the purchase of readily marketable debt securities which are either publicly
distributed or customarily purchased by institutional investors. Although such
loans are not presently intended, this prohibition will not preclude a Fund from
loaning portfolio securities to broker-dealers or other institutional investors
if at least 102% cash collateral is pledged and maintained by the borrower,
provided such portfolio security loans may not be made if, as a result, the
aggregate of such loans exceeds 10% of the value of the Fund's total assets at
the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities, except that, in
the case of the Arkansas and Tennessee Funds, all or substantially all of the
assets of either Fund may be invested in another registered investment company
having the same investment objective and policies as the Fund.
5. Purchase securities from or sell to the Trust's officers and trustees, or any
firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities, except that, in the
case of the Arkansas and Tennessee Funds, to the extent this restriction is
applicable, all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund, or except as permitted under investment restriction
Number 9 regarding the purchase of shares of money market funds managed by
Advisers or its affiliates.
6. 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.
7. 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.
8. Invest in companies for the purpose of exercising control or management,
except that, in the case of the Arkansas and Tennessee Funds, to the extent this
restriction is applicable, all or substantially all of the assets of either Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund.
9. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition, or reorganization, provided that, in the
case of the Arkansas and Tennessee Funds, all or substantially all of the assets
of either Fund may be invested in another registered investment company having
the same investment objective and policies as the Fund. To the extent permitted
by exemptions which may be granted under the 1940 Act, each Fund may invest in
shares of one or more money market funds managed by Advisers or its affiliates.
10. Invest more than 25% of its assets in securities of any industry, except
that, in the case of the Arkansas and Tennessee Funds, to the extent this
restriction is applicable, all or substantially all of the assets of either Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund. For purposes of this limitation,
municipal securities and U.S. government obligations are not considered to be
part of any industry.
So long as the percentage restrictions above are observed by each Fund at the
time it purchases any security, changes in values of particular Fund assets or
the assets of a Fund as a whole will not cause a violation of any of the
foregoing restrictions.
To the extent municipal securities constitute securities issued to finance
non-governmental business activities, they are generally not deemed to be exempt
from taxation under federal law. As such, these securities, if purchased by a
Fund, will be subject to the prohibition in investment restriction number 10
against concentrating in an industry.
In addition, the Funds may not invest in real estate limited partnerships or in
interests in oil, gas or other mineral leases.
Trustees and Officers
The Board of Trustees has the responsibility for the overall management of the
Trust and each Fund, including general supervision and review of each Fund's
investment activities. The trustees, in turn, elect the officers of the Trust
who are responsible for administering day-to-day operations of the Trust and
each Fund. The affiliations of the officers and trustees and their principal
occupations for the past five years are listed below. Trustees who are deemed to
be "interested persons" of the Trust, as defined in the 1940 Act, are indicated
by an asterisk (*).
Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc.; (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Trustee
111 New Montgomery St., 402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (62) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/ Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc.; and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc.; and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/ Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc.; and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Trustee
8212 Burning Tree Rd.
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc.; Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc.; (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Hayato Tanaka (78) Trustee
277 Haihai St.
Hilo, HI 96720
Retired, former owner of The Jewel Box Orchids; and director or trustee, as the
case may be, of two of the Franklin Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial
Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc.; and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of 37
of the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39) Vice President
777 Mariners Island Blvd.
San Mateo CA 94404
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 24 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (32) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Trustees not affiliated with the investment manager ("nonaffiliated trustees")
may in the future be, but are not currently paid fees. As indicated above,
certain of the Trust's nonaffiliated trustees also serve as directors, trustees
or managing general partners of other investment companies in the Franklin Group
of Funds" and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated trustees by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Number of Boards in
Total Fees Received From the Franklin Templeton
the Franklin Templeton Group of Funds On
Name Group of Funds* Which Each Serves**
<S> <C> <C>
Frank H. Abbott, III............................. $176,870 31
Harris J. Ashton................................. 319,925 56
S. Joseph Fortunato.............................. 336,065 58
David Garbellano................................. 153,300 30
Frank W.T. LaHaye................................ 150,817 26
Gordon S. Macklin................................ 303,685 53
Hayato Tanaka.................................... 400 2
</TABLE>
*For the calendar year ended December 31, 1994.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of more than 162 U.S. based mutual
funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees 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.
As of July 5, 1995, the trustees and officers, as a group, owned of record and
beneficially approximately 9,113.807 shares of the California Fund, or less than
1% of the total outstanding shares of the California Fund and no shares of the
other Funds. Many of the Trust's trustees also own shares in various of the
other funds in the Franklin Templeton Group of Funds. Charles E. Johnson is the
son and nephew, respectively, of Charles B. Johnson and Rupert H. Johnson, Jr.,
who are brothers.
Investment Advisory and Other Services
The investment manager of each Fund in the Trust is Advisers. Advisers is a
wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly-owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The Manager and
other subsidiary companies of Resources currently manage over $128 billion in
assets for over 3.8 million shareholders in addition to foundations and
endowments, employee benefit plans, and individuals.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Funds to purchase, hold or sell and the selection of brokers through whom each
Fund's portfolio transactions are executed. The Manager's extensive research
activities include, as appropriate, traveling to meet with issuers and to review
project sites. The Manager's activities are subject to the review and
supervision of the trustees to whom the Manager renders periodic reports of each
Fund's investment activities. Under the terms of the management agreement, the
Manager provides office space and office furnishings, facilities and equipment
required for managing the business affairs of the Trust; maintains all internal
bookkeeping, clerical, secretarial and administrative personnel and services;
and provides certain telephone and other mechanical services. The Manager is
covered by fidelity insurance on its officers, directors, and employees for the
protection of the Trust. See the Statement of Operations in the financial
statements included in the Trust's Annual Report to Shareholders dated May 31,
1995.
Pursuant to the management agreement, each Fund is obligated to pay the Manager
a fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year)
for the first $100 million of net assets of the Fund; 1/24 of 1% (approximately
1/2 of 1% per year) on net assets of the Fund in excess of $100 million up to
$250 million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net
assets of the Fund in excess of $250 million. The fee is computed and paid
monthly based on the average daily net assets of each Fund during the month.
The Manager has agreed in advance to waive all of its management fees and make
payment of certain operating expenses of the Funds. This arrangement may be
terminated by the Manager at any time upon notice to the Trust's Board of
Trustees. The management agreement specifies that the management fee will be
reduced to the extent necessary to comply with the most stringent limits on the
expenses which may be borne by each Fund as prescribed by any state in which
such Fund's shares are offered for sale. The most stringent current limit
requires the Manager to reduce or eliminate its fee to the extent that aggregate
operating expenses of each Fund (excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation costs) would otherwise
exceed in any fiscal year 21/2% of the first $30 million of average net assets
of the Fund, 2% of the next $70 million of average net assets of the Fund and
11/2% of average net assets of the Fund in excess of $100 million. Expense
reductions have not been necessary based on state requirements.
The table below sets forth on a per Fund basis the management fees before any
advance waiver and the fees paid for the fiscal years ended May 31, 1993, 1994,
and 1995.
1995 Fees Before Management
Advance Fees Paid
Waiver By the Fund
Arkansas Fund............ $ 18,634 $0
California Fund.......... 256,329 0
Hawaii Fund.............. 175,686 0
Tennessee Fund........... 22,569 0
Washington Fund.......... 29,848 0
1994 Fees Before Management
Advance Fees Paid
Waiver By the Fund
Arkansas Fund............ $ 1,175 $0
California Fund.......... 111,730 0
Hawaii Fund.............. 152,252 0
Tennessee Fund........... 1,181 0
Washington Fund.......... 22,669 0
1993 Fees Before Management
Advance Fees Paid
Waiver By the Fund
Arkansas Fund............ n/a n/a
California Fund.......... $ 1,175 $0
Hawaii Fund.............. 61,202 0
Tennessee Fund........... n/a n/a
Washington Fund.......... 1,167 0
The management agreement is in effect until March 31, 1996. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of each Fund's outstanding
voting securities, and in either event by a majority vote of the trustees who
are not parties to the management agreement or interested persons of any such
party (other than as trustees of the Trust), cast in person at a meeting called
for that purpose. The management agreement may be terminated without penalty at
any time by the Trust or by the Manager on 30 days' written notice and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
Other Services
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Funds and acts as the Funds' transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Trust. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended May 31, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
dated May 31, 1995.
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Trust are principal transactions at net prices,
the Trust incurs little or no brokerage costs. Each Fund deals directly with the
selling or purchasing 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 utilizing 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 price. As a general rule, the
Funds do not purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to receive the
commission. Each Fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services rendered
by such dealers in the execution of orders. It is not possible to place a dollar
value on the special executions or on the research services received by Advisers
from dealers effecting transactions in portfolio securities. The allocations of
transactions in order to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staff of other securities firms. As long
as it is lawful and appropriate to do so, the Manager and its affiliates may use
this research and other data in their investment advisory capacities with other
clients. Provided that the Trust's officers are satisfied that the best
execution is obtained, the sale of Fund shares may also be considered as a
factor in the selection of broker-dealers to execute each Fund's portfolio
transactions.
If purchases or sales of securities of a Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such 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. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as any Fund is concerned. In other cases, it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to a Fund.
During the past three fiscal years ended May 31, 1995, the Funds paid no
brokerage commissions. As of May 31, 1995, the Funds did not own securities of
their regular broker-dealers.
Additional Information
Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Funds must be denominated in U.S. dollars. Each Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see Prospectuses "Exchange Privilege"), it should
be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the fund into which a Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of a Fund to complete an exchange
for shares of any of the investment companies will be effected at the close of
business on the day the request for exchange is received in proper form at the
net asset value then effective.
A Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
Shares are eligible to receive dividends beginning on the first business day
following settlement of the purchase transaction, through the date on which the
Fund writes a check or sends a wire on redemption transactions.
Dividend checks which are returned to the Funds marked "unable to forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option and the proceeds will be reinvested in additional shares at
net asset value until new instructions are received.
Each Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China, the Funds'
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Funds may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of each Fund will be
offered with the following schedule of sales charges:
Sales
Size of Purchase - in U.S. dollars Charge
Up to $100,000................................ 3%
$100,000 to $1,000,000........................ 2%
Over $1,000,000............................... 1%
Purchases and Redemptions
through Securities Dealers
Orders for the purchase of shares of each Fund received in proper form prior to
the scheduled closing of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled closing of the Exchange will be effected at the Fund's
public offering price on the day it is next calculated. The use of the term
"securities dealer" herein shall include other financial institutions which,
pursuant to an agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with the Fund. Such reference, however, is
for convenience only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases
As discussed in the Prospectuses under "How to Buy Shares of the Fund(s) -
Description of Special Net Asset Value Purchases," certain categories of
investors may purchase shares of a Fund without a front-end sales charge ("net
asset value") or a contingent deferred sales charge. Distributors or one of its
affiliates may make payments, out of its own resources, to securities dealers
who initiate and are responsible for such purchases, as indicated below.
Distributors may make these payments in the form of contingent advance payments,
which may be recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor redemptions made
within 12 months of the calendar month following purchase. Other conditions may
apply. All terms and conditions may be imposed by an agreement between
Distributors, or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and taxable-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
taxable income Franklin Templeton Funds made at net asset value by
non-designated retirement plans: 0.75% on sales of $1 million but less than $2
million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50%
on sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or more.
These payment breakpoints are reset every 12 months for purposes of additional
purchases. With respect to purchases made at net asset value by certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
Distributors, or one of its affiliates, out of its own resources, may pay up to
1% of the amount invested.
Letter of Intent
An investor may qualify for a reduced sales charge on the purchase of shares of
a Fund, as described in the Prospectuses. At any time within 90 days after the
first investment which the investor wants to qualify for the reduced sales
charge, a signed Shareholder Application, with the Letter of Intent section
completed, may be filed with the Fund. After the Letter of Intent is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based upon
purchases in more than one of the Franklin Templeton Funds will be effective
only after notification to Distributors that the investment qualifies for a
discount. The shareholder's holdings in the Franklin Templeton Funds acquired
more than 90 days before the Letter of Intent is filed will be counted towards
completion of the Letter of Intent but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions made by the shareholder
during the 13-month period will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge, depending upon the
amount actually purchased (less redemptions) during the period. The upward
adjustment does not apply to designated benefit plans. An investor who executes
a Letter of Intent prior to a change in the sales charge structure for a Fund
will be entitled to complete the Letter of Intent at the lower of (i) the new
sales charge structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with a Fund.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of a Fund registered in the
investor's name. If the total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in the name of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the amount specified
under the Letter of Intent and is an amount which would qualify for a further
quantity discount, a retroactive price adjustment will be made by Distributors
and the securities dealer through whom purchases were made pursuant to the
Letter of Intent (to reflect such further quantity discount) on purchases made
within 90 days before and on those made after filing the Letter. The resulting
difference in offering price will be applied to the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter, the investor will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge which would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance the reserved shares held for the investor's account
will be deposited to an account in the name of the investor or delivered to the
investor or to the investor's order. If within 20 days after written request
such difference in sales charge is not paid, the redemption of an appropriate
number of reserved shares to realize such difference will be made. In the event
of a total redemption of the account prior to fulfillment of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption, and the balance will be forwarded to the investor.
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 a Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission (the "SEC"). In the
case of requests for redemption in excess of such amounts, the trustees reserve
the right to make payments in whole or in part in securities or other assets of
the Fund from which the shareholder is redeeming, in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of such Fund. In such circumstances, the securities distributed
would be valued at the price used to compute a Fund's net assets. Should a Fund
do so, a shareholder may incur brokerage fees in converting the securities to
cash. The Funds do not intend to redeem illiquid securities in kind; however,
should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.
Redemptions by Each Fund
Due to the relatively high cost of handling small investments, each Fund
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of each Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectuses, each Fund generally calculates net asset value as
of the scheduled closing of the Exchange (generally 1:00 p.m. Pacific time) each
day that the Exchange is open for trading. As of the date of this SAI, the Trust
is informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued as stated in the Prospectuses.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled closing of the Exchange. The values of such securities used in
computing the net asset value of the Fund's shares are determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled closing of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Board of Trustees.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the record date
(sometimes known as the ex-date). The processing date for the reinvestment of
dividends may vary from month to month, and does not affect the amount or value
of the shares acquired.
Reports to Shareholders
The Trust sends annual and semi-annual reports to its shareholders regarding
each Fund's performance and its portfolio holdings. Shareholders who would like
to receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Funds. The
cost of these services is not borne by the Funds.
Investor Services may pay certain financial institutions, which maintain omnibus
accounts with the Funds on behalf of numerous beneficial owners, for
recordkeeping operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Funds normally
pay Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
The Trust's Underwriter
Pursuant to an underwriting agreement in effect until March 31, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of each Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the Trust's Board of Trustees or by a vote of the
holders of a majority of the outstanding voting securities of each Fund, and in
either event by a majority vote of the Trust's trustees who are not parties to
the underwriting agreement or interested persons of any such party (other than
as trustees of the Trust), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event of its
assignment and may be terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of each Fund's 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.
In connection with the offering of the Funds' shares, aggregate underwriting
commissions received by Distributors for the fiscal years ended May 31, 1993,
1994, and 1995 and the amounts retained after reallowances to dealers were as
follows:
1995 Total Total
Commissions Commissions
Received Retained
Arkansas Fund............ $ 62,191 $ 2,536
California Fund.......... 475,044 34,733
Hawaii Fund.............. 185,598 12,861
Tennessee Fund........... 98,793 4,642
Washington Fund.......... 34,183 2,172
1994 Total Total
Commissions Commissions
Received Retained
Arkansas Fund............ $ 0 $ 0
California Fund.......... 847,492 66,225
Hawaii Fund.............. 420,455 51,159
Tennessee Fund........... 0 0
Washington Fund.......... 81,291 4,336
1993 Total Total
Commissions Commissions
Received Retained
Arkansas Fund............ n/a n/a
California Fund.......... $ 1,801 $ 0
Hawaii Fund.............. 538,200 54,367
Tennessee Fund........... n/a n/a
Washington Fund.......... 0 0
Distribution Plans
The Funds have adopted Distribution Plans pursuant to Rule 12b-1 under the 1940
Act (the "Plans"), whereby the Hawaii Fund may pay up to a maximum of 0.10% per
annum (1/10 of 1%) of its average daily net assets for expenses incurred in the
promotion and distribution of its shares, and the Arkansas, California,
Tennessee and Washington Funds may pay up to a maximum of 0.15% per annum of
their average daily net assets for expenses incurred in the promotion and
distribution of their shares.
Pursuant to these Plans, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of a Fund's shares, including, but
not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have executed a servicing
agreement with a Fund, Distributors or its affiliates.
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent a Fund, the Manager or
Distributors or other parties on behalf of a Fund, the Manager or Distributors,
make payments that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares of a Fund within the context
of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plans, plus any other payments deemed to be made pursuant to the
Plans, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If a bank
were prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of a Fund and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which a Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of a Fund may be required to register as
dealers pursuant to state law.
Each Plan has been approved in accordance with the provisions of Rule 12b-1.
Each plan is renewable annually by a vote of the Trust's Board of Trustees,
including a majority vote of the trustees who are non-interested persons of the
Trust and who have no direct or indirect financial interest in the operation of
the Plans, cast in person at a meeting called for that purpose. It is also
required that the selection and nomination of such trustees be done by the
non-interested trustees. Each Plan and any related agreement may be terminated
at any time, without any penalty, by vote of a majority of the non-interested
trustees on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
Management Agreement with the Manager or the Underwriting Agreement with
Distributors, or, as to each Fund, by vote of a majority of that Fund's
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
Each Plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of each Fund's outstanding shares, and all such material amendments to a Plan or
any related agreements shall be approved by a vote of the non-interested
trustees, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board of Trustees at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Trustees with such other
information as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans should be
continued.
For the fiscal year ended May 31, 1995, the total amount paid by each Fund
pursuant to the Plans was paid to brokers or dealers in the amounts listed
below.
Fund Amount paid
Arkansas Fund............................ $ 898
California Fund.......................... 35,842
Hawaii Fund.............................. 19,175
Tennessee Fund........................... 1,672
Washington Fund.......................... 2,286
Additional Information Regarding Taxation
As stated in the Prospectuses, each fund has elected and/or intends to elect to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The trustees reserve the right
not to maintain the qualification of any Fund as a regulated investment company
if they determine such course of action to be beneficial to the shareholders. In
such case, a Fund will be subject to federal and possibly state corporate taxes
on its taxable income and gains, to the alternative minimum tax on a portion of
its tax-exempt income, and distributions (including tax-exempt interest
dividends to shareholders) will be taxable to the extent of such Fund's
available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12-month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to shareholders by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Funds and received by the shareholder
on December 31 of the calendar year in which they are declared. Each Fund
intends as a matter of policy to declare and pay such dividends, if any, in
December to avoid the imposition of this tax, but does not guarantee that its
distributions will be sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
Since the Funds' income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Funds'
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Funds for the fiscal year ended
May 31, 1995, qualified for this deduction and it is not anticipated that any of
the current year dividends for any of the Funds will so qualify.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of such Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of a Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the FranklinTempleton Funds (defined under "How to Buy Shares of
Each Fund" in the Prospectuses) and a sales charge which would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. Shareholders should consult with their
tax advisors concerning the tax rules applicable to the redemption or exchange
of Fund shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a Fund from direct obligations of the U.S.
Government, subject in some states to minimum investment requirements that must
be met by a fund. Investments in GNMA/FNMA securities and repurchase agreements
collateralized by U.S. Government securities do not generally qualify for
tax-free treatment. While it is not the primary investment objective of any Fund
of the Trust to invest in such obligations, the Funds are authorized to so
invest for temporary or defensive purposes. To the extent that such investments
are made, any affected Fund will provide shareholders with the percentage of any
dividends paid which may qualify for such tax-free treatment at the end of each
calendar year. Shareholders should then consult with their own tax advisers with
respect to the application of their state and local laws to these distributions
and on the application of other state and local laws on distributions and
redemption proceeds received from the Fund.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of any Fund.
General Information
Performance
As noted in the Prospectuses, a Fund may from time to time quote various
performance figures to illustrate its past performance. It may occasionally cite
statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. 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. Current yield and average annual compounded total return
quotations used by the Funds are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the Funds to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order, and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge in effect currently.
In considering the quotations of total return by a Fund, investors should
remember that the maximum front-end sales charge reflected in each quotation is
the maximum one time fee (charged on all direct purchases) which will have its
greatest impact during the early stages of an investor's investment in one of
the Funds. The actual performance of an investment will be affected less by this
charge the longer an investor retains the investment in such Fund. The average
annual compounded rates of return for the Funds for the indicated periods ended
on May 31, 1995 was as follows.
Average Annual
Total Return
Inception One- From
of the Fund Year Inception
Arkansas Fund........ 05/10/94 2.53% 3.03%
California Fund...... 05/03/93 4.46% 3.47%
Hawaii Fund.......... 02/26/92 4.61% 6.39%
Tennessee Fund....... 05/10/94 4.08% 5.06%
Washington Fund...... 05/03/93 5.46% 2.62%
These figures were calculated according to the following SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
As discussed in the Prospectuses, a Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as a Fund's average annual compounded rate, except that such
quotations will be based on a Fund's actual return for a specified period rather
than on its average return over one-, five-, and ten-year periods or fractional
period thereof. The total rates of return for the indicated periods ended on May
31, 1995 was as follows:
Aggregate Annual
Total Return
Inception One- From
of the Fund Year Inception
Arkansas Fund........ 05/10/94 2.53% 3.22%
California Fund...... 05/03/93 4.46 7.36
Hawaii Fund.......... 02/26/92 4.61 22.41
Tennessee Fund....... 05/10/94 4.08 5.37
Washington Fund...... 05/03/93 5.46 5.52
In considering the quotations of total return by a Fund, investors should
remember that the sales charge reflected in each quotation is the maximum one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of an investor's investment in one of the Funds. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in such Fund.
Yield
Current yield reflects the income per share earned by a Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for each of the Funds for the 30-day period ended on May 31, 1995 were as
follows:
Arkansas Fund................................ 5.52%
Hawaii Fund.................................. 5.46
California Fund.............................. 6.50
Tennessee Fund............................... 5.78
Washington Fund.............................. 5.80
These figures were obtained using the following SEC formula:
6
Yield = 2[(a-b + 1) -1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Tax Equivalent Yield
A Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. Such yield is computed by dividing that
portion of the yield of a Fund (computed as indicated above) which is tax-exempt
by one minus the highest applicable combined federal and state income tax rate
(and adding the product to that portion of the yield of a Fund that is not
tax-exempt, if any). The tax equivalent yield for each of the Funds for the
30-day period ended on May 31, 1995 were as follows:
Arkansas Fund............................... 9.83%
California Fund............................. 12.09
Hawaii Fund................................. 10.04
Tennessee Fund.............................. 10.18
Washington Fund............................. 9.60
As of the date of this SAI, the state and the combined state and federal income
tax rates upon which tax equivalent yield quotations are based are 10% and
45.64% for the Hawaii Fund, 11% and 46.24% for the California High Yield Fund,
7% and 43.83% for the Arkansas Fund, and 6% and 43.22% for the Tennessee Fund.
For the Washington Fund, which currently has no state income tax, the maximum
federal tax rate of 39.6% will be used. The tax equivalent yield quotations by
the Funds will be based upon a 39.6% federal income tax rate.
From time to time, as any changes to such rates become effective, tax equivalent
yield quotations advertised by the Funds will be updated to reflect such
changes. The Funds expect updates may be necessary as tax rates are frequently
changed by federal, state and local governments. The advantage of tax-free
investments, such as in the Funds of the Trust, will be enhanced by any tax rate
increases. Therefore, the details of specific tax increases may be used in sales
material for each Fund.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to a Fund's shareholders. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by dividing the
total amount of dividends per share paid by the Fund during the past 12 months
by a current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to a Fund's current
distribution rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current federal and state tax
rates available to a Fund.
Under certain circumstances, such as when there has been a change in the amount
of dividend payout or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid over the period such policies were
in effect, rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gains, and is calculated over a different
period of time.
Volatility
Occasionally, statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability of
net asset value or total return around an premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to a Fund may
quote a "Current Distribution Rate for Net Asset Value Investments." This rate
is computed by adding the income dividends paid by a Fund during the last 12
months and dividing that sum by a current net asset value. Figures for yield,
total return and other measures of performance for Net Asset Value Investments
may also be quoted. These will be derived as described elsewhere in this SAI
with the substitution of net asset value for public offering price.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Funds may include in their advertising or sales material information
relating to investment objectives and performance results of funds belonging to
the Templeton Group of Funds. Resources is the parent company of the advisers
and underwriter of both the Franklin Group of Funds(R) and Templeton Group of
Funds.
Comparisons
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements and other materials regarding the
Funds may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices - LBMBI
measures yield, price and total return for the municipal bond market.
d) Bond Buyer's 20-Bond Index - an index of municipal bond yields based
upon yields of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
f) Bond Buyers 40 Bond Index - an index based on the yields of 40 long-term
tax-exempt municipal bonds. Designed to be the basis for the Municipal Bond
Index in futures contracts.
g) Financial publications: The Wall Street Journal and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
j) Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is published
weekly in the Los Angeles Times and the San Francisco Chronicle.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
l) Savings & Loan Historical Interest Rates as published by the U.S. Savings &
Loan League Fact Book.
m) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
From time to time, advertisements or information for the Funds may include a
discussion of certain attributes or benefits to be derived by an investment in
the Funds. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Funds' performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in the Funds involve the risk of fluctuation
of principal value, a risk generally not present in an investment in a
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Funds' fixed-income investments, as well
as the value of their shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Funds' shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in the Funds is not insured by any federal, state or
private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Funds' portfolios, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their figures. In addition there can be no assurance that the Funds will
continue this performance as compared to such other averages.
Other Features and Benefits
Each of the Funds may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may assist
an investor in determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund a child's
college education. (Projected college cost estimates are based upon current
costs published by the College Board.) The Franklin Retirement Planning Guide
leads an investor through the steps to start a retirement savings program. Of
course, an investment in a Fund cannot guarantee that such goals will be met.
Miscellaneous Information
The Funds of the Trust are members of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 47 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $128
billion in assets under management for more than 3.8 million shareholder
accounts and offers 162 U.S.-based mutual funds. Each Fund may identify itself
by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
Franklin is one of the largest and oldest managers of municipal bond funds in
the country. Franklin currently offers 42 tax-free and municipal bond funds
(funds whose dividends may be subject to the alternative minimum tax system),
including 33 funds free from both federal and state personal income taxes, and
manages over $41.2 billion in municipal securities for more than 875,000
investors.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1994, taxes could cost as much as
$47 on every $100 earned from a fully taxable investment (based on the combined
39.6% federal tax rate and the highest state tax rate of 12% for 1994. In
addition, investors subject to the federal or state alternative minimum tax may
find a small portion of their income distribution subject to such tax.) Franklin
municipal securities funds, however, offer tax relief through a professionally
managed portfolio of municipal securities selected based on their yield, quality
and maturity. An investment in a Franklin municipal securities fund can provide
an investor with the potential to earn income exempt from regular federal income
taxes, and depending on the fund, state and local taxes as well, while
supporting state and local public projects. Franklin municipal funds may also
provide potential tax-free compounding, when dividends are reinvested. An
investment in Franklin's municipal securities funds can grow more rapidly than a
similar taxable investment.
General
The Trust will amortize the organizational expenses attributable to each Fund
over a period of five years from the effective date of the registration
statement covering each Fund. New investors purchasing shares of a Fund after
the effective date of such Fund's registration statement under the Securities
Act of 1933 will be bearing such expenses during the amortization period.
The shareholders of a Delaware business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds shares. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding, and errors and omissions insurance)
for the protection of the Trust, its shareholders, trustees, officers, employees
and agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the Trust
itself is unable to meet its obligations.
From time to time, the number of shares of each Fund 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 Trust, as of July 5, 1995, the
principal shareholders of the Funds, beneficial or of record, their addresses
and the amount of their share ownership were as follows:
<TABLE>
<CAPTION>
Number
of Shares Percentage
<S> <C> <C>
Arkansas Fund
Franklin Resources, Inc.............................................. 230,794.814 52.15%
777 Mariners Island Blvd.
San Mateo, CA 94404
Hawaii Fund
Franklin Resources, Inc.............................................. 240,682.844 6.93%
777 Mariners Island Blvd.
San Mateo, CA 94404
Liu Chang and Lucy C.H. Chang........................................ 468,603.561 13.48%
1525 Wilder Ave. 1108
Honolulu, HI 96822
Tennessee Fund
Franklin Resources, Inc.............................................. 230,919.695 36.99%
777 Mariners Island Blvd.
San Mateo, CA 94404
Washington Municipal Bond Fund
Franklin Resources, Inc.............................................. 245,994.192 42.53%
777 Mariners Island Blvd.
San Mateo, CA 94404
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Trust has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Trust to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the Internal Revenue Service in response
to a Notice of Levy.
Appendix A -
Further Information on Special Factors
Affecting Each State Fund
The following information is a summary of special factors affecting each of the
individual state Funds. It does not purport to be a complete description of such
factors and is based primarily upon information derived from public documents
relating to securities offerings of issuers of such states and other
historically reliable sources. The Trust has not independently verified any of
this data. The market value of the shares of any Fund may fluctuate due to
factors such as changes in interest rates, matters affecting a particular state,
or for other reasons.
ARKANSAS
Arkansas has consistently maintained a balanced budget and a conservative
approach to its financial operations. Under the state's Revenue Stabilization
Act and other laws enacted in the early 1970s, all general obligation debt must
be authorized by voters, restrictions are placed on the total amount of debt
that can be issued during any two year budget cycle, and the state is prohibited
from engaging in deficit spending i.e. spending cannot exceed revenues in any
fiscal year. As a result, Arkansas has maintained one of the lowest debt loads
of the states, despite notable increases since 1990, with debt per capita equal
to $293.
During fiscal 1994, revenues collected exceeded 1993 levels by 9.3%.
Conservative estimates based on slower employment and income growth project
revenue growth of 4.6% for each of fiscal years 1995 and 1996 and 5.7% for
fiscal 1997. Through February, revenue collections for fiscal 1995 have actually
exceeded projections by 1.8%, with declines in revenues from corporate income
and alcoholic beverage taxes offset by increases in other tax categories.
Despite the state's steady and strong economic growth, many counties in Arkansas
may face financial pressures in the coming years, as a result of the state
Supreme Court's recent ruling declaring a county's one cent sales tax
unconstitutional. The tax was found to be unconstitutional because it exceeded
the half-cent limit on general purpose sales taxes imposed by the state's
constitution. This ruling could affect approximately 63 of the state's 75
counties which have general purpose sales taxes exceeding the half-cent limit,
including Pulaski County, the state's most populous county.
CALIFORNIA
On June 6, 1978, California voters approved Proposition 13, which added Article
XIIIA to the California Constitution. The principal thrust of Article XIIIA is
to limit the amount of ad valorem taxes on real property to one percent of the
full cash value as determined by the county assessor. The assessed valuation of
all real property may be increased, but not in excess of two percent per year,
or decreased to reflect the rate of inflation or deflation as shown by the
consumer price index. Article XIIIA requires a vote of two thirds of the
qualified electorate to impose special taxes, and completely prohibits the
imposition of any additional ad valorem, sales or transaction tax on real
property (other than ad valorem taxes to repay general obligation bonds issued
to acquire or improve real property), and requires the approval of two-thirds of
all members of the State Legislature to change any state tax laws resulting in
increased tax revenues.
On November 6, 1979, California voters approved the initiative seeking to amend
the California Constitution entitled "Limitation of Government Appropriations"
which added Article XIIIB to the California Constitution. Under Article XIIIB
state and local governmental entities have an annual appropriations limit and
may not spend certain monies which are called appropriations subject to
limitations (consisting of tax revenues, state subventions and certain other
funds) in an amount higher than the appropriations limit. Generally, the
appropriations limit is to be based on certain 1978-79 expenditures, and is to
be adjusted annually to reflect changes in consumer prices, population and
services provided by these entities.
Decreases in state and local revenues in future fiscal years as a consequence of
these initiatives may continue to result in reductions in allocations of state
revenues to California municipal issuers or reduce the ability of such
California issuers to pay their obligations.
In its third year of economic recovery, California continues to show gradual
improvement. Although a large portion of the deficit accumulated during the
rececession still remains, it the state will likely be able to retire its
outstanding short-term borrowing as scheduled in April. Its balance sheet is
still weak, but California's reliance on external cash flow has been reduced
from previous years, and in the fiscal year ended June 30, 1995, the state
produced an operating surplus of approximately $800 million.
The 1995-1996 budget, which was passed on August 3, 1995, calls for an operating
surplus of approximately $600 million. The budget relies on the unlikely
prospect that federal government will provide $500 million in new funding for
incarceration of illegal aliens and other programs, as well as allow California
to cut an additional $500 million from federally mandated programs such as AFDC
and MediCal. At the same time, the temporary top marginal personal income tax
rates have expired, bringing down such rates from 10% and 11% to 9.3%. School
funding will increase by approximately $1 billion over last year, and there will
be an 8% increase in the share of the state budget devoted to prisons.
California's long-term economic difficulties will continue for an extended
period of time despite a gradually improving economy. K-12 education and prison
costs are expected to rise more rapidly than the overall budget, and county
governments are having difficulties resulting from the shift of property taxes
from counties to schools. Even in areas where the growth rates appear to be
decreasing, such as in health and welfare spending, it is likely that California
will encounter the same uncertainties faced by other states as the federal
government leaves more control to the states and as California's population
grows older.
Financial, economic and political factors will continue to have significant
effects on the health of the California economy. Voter initiatives have a strong
impact on the budget, and the budget process has difficulty reconciling spending
needs with a low tolerance for taxes. The constitutional reform commission will
present a final plan to address many of these issues in January, and
California's credit condition is expected to improve at a fairly limited rate
unless such a plan is adopted.
HAWAII
Hawaii has historically enjoyed a strong financial position. Past recessions in
both the U.S. and Asia, however, adversely affected the state's tourism and
construction industries, two of its largest industries, resulting in substantial
reductions in economic growth and tax revenues. Economic recovery has been slow,
creating financial pressures on the state's fiscal position.
Hawaii's debt levels are high and continue to grow, primarily due to the state's
role in delivering services such as education and health care. Debt per capita
is $4,150 and total debt service represents approximately 11% of the state's
operating expenditures. While debt at the state level is high, overall debt is
manageable as counties continue to have relatively low debt burdens.
During fiscal 1994, decreased growth and tax revenues resulted in a reduction of
the state's general fund balance of approximately $25 million, although reserves
remain strong at 8% of current expenditures. Over the next several years, fiscal
pressures are expected to continue. By 1997, the general fund balance is
projected to decline to 2.5% of the state's expenditures and spending cuts of
more than $150 million will be required.
TENNESSEE
Tennessee has historically had a sound financial position, though as in many
states, the recession has had a negative impact on revenues. Although the
recession produced shortfalls in fiscal years 1991 and 1992, renewed economic
growth, increased taxes, and cost controls in fiscal 1993 generated a $132
million general fund surplus and the rainy day revenue fluctuation fund was
restored to $150 million from $75 million in 1992. For fiscal 1994, revenues
growth continued and the Rainy Day Fund has reached $150 million and it is
expected to remain at that level through the fiscal year ended 1995.
In January 1994, TennCare, the state's comprehensive health care program, was
implemented. The program is designed to restructure the health care delivery
system and extends benefits to the uninsured. It is anticipated that the state
should be able to produce sizable savings and limit the growth of Medicaid
spending. The state has received a waiver from the federal government to be free
of the requirements of the Medicaid program. The 1995-1996 budget assumes no new
revenues or taxes and includes reductions in state agency budget. Also included
in the state's budget initiatives for fiscal 1995-1996 is continued
implementation of the Education Improvement Act of 1992, which guarantees a
basic level of service for all primary and secondary school students in the
state under a Basic Education Program formula. A substantial portion of the
capital outlay projects continue to be financed on a current basis. Funds from
general obligation bonds have been used mostly for higher education and
correctional facilities.
Tennessee's financial operations are considerably different than most other
states because there is no state payroll income tax. This factor, together with
the state's reliance on the sales tax for approximately 60% of general fund
receipts, exposes total state tax collections to considerably more volatility
than would otherwise be the case and, in the event of an economic downswing,
could affect the state's ability to pay principal and interest in a timely
manner.
Debt issuance is limited by statute, additional general obligation bonds may
only be issued if pledged special revenues for the preceding fiscal year are at
least 1.5 times the peak annual debt service requirements on both new and
outstanding bonds. In 1994, the debt service limit was $326.2 million and the
peak debt service was $102.4 million. Tennessee's outstanding general obligation
indebtedness is $837 million. Overall debt remains low at $633 per capita.
WASHINGTON
During 1991, in response to economic softening, the state made downward
revisions in its economic and revenue forecasts for the 1991-93 biennium, and
enacted corresponding adjustments on the expenditure side of the budget. As a
result of the adjustments, the 1991-93 biennium closed with an ending unreserved
general fund balance of approximately $234 million, in addition to a $100
million balance in the budget stabilization fund (or "rainy day fund"). These
balances have decreased from the beginning of the 1993-1995 biennium, when the
unreserved fund balance and the rainy day fund stood at $468 million and $260
million, respectively.
The total 1993-95 biennial general fund budget was $16.3 billion, up 6% over the
1991-1993 biennium. On April 6, 1994, the governor signed a supplemental budget,
which included $168 million of additional spending for various one-time items,
including grants to local school districts. The state ended the 1993-1995
biennium with $455 million in the general fund.
In November 1993, voters approved Initiative 601, which will limit state
spending increases to the average of the rate of inflation and population growth
over the previous three years beginning with the 1995-1997 biennium. The impact
of Initiative 601 is expected to be significant but manageable. Since July 1,
1995, tax increases require a two-thirds vote of the legislature but only up to
the spending limit.
The total 1995-97 biennial general fund budget is $17.6 billion. The budget
successfully closed a gap reflecting new expenditures of approximately $2
billion necessary to keep up with growth in education enrollment, prison
populations, debt service and health care costs. The state addressed the $2
billion imbalance through a combination of expenditure reductions, program
restructurings, and increases in revenue, which included an expansion of the
sales tax base to include selected business services and an increase in the
business and occupation tax rate. In May 1995, the governor signed a
supplemental budget, which included revenue and expenditure adjustments and
initiated limits to program growth in anticipation of the July 1, 1995
implementation of Initiative 601. Presently, Washington does not have an income
tax and although from time to time one has been proposed, it was not seriously
considered during the 1995-97 biennial budget debate.
State financial performance is anticipated to be remain positive despite
continued reductions in operations at Boeing, whose employees represent about 4%
of the state's employment and the 1995 implementation of Initiative 601. The
state, in response to earlier Boeing reductions, promptly lowered its revenue
forecasts and enacted a 1993-95 biennial budget aimed at enhancing reserve
levels and bringing spending and revenue back into balance.
Appendix B -
Description of Municipal Securities Ratings
Municipal Bonds
Moody's Investors Service ("Moody's")
Aaa: Municipal bonds which are 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 by an
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 which are rated Aa are judged to be of 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 as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are 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: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are 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. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation ("S&P")
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates and, hence, provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
Fitch's Investors Services, Inc. ("Fitch")
AAA bonds: (highest quality) "the obligor has an extraordinary ability to
pay interest and repay principal which is unlikely to be affected by reasonably
foreseeable events."
AA bonds: (high quality) "the obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA rated securities or
more subject to possible change over the term of the issue."
A bonds: (good quality) "the obligor's ability to pay interest and repay
principal is strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings."
BBB bonds: (satisfactory bonds) "the obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to weaken this ability than bonds
with higher ratings."
Municipal Notes
Moody's
Moody's ratings for state, municipal, and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S: 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.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust dated May 31, 1995, including the auditors' report, are
incorporated herein by reference.
</TABLE>
