As filed with the Securities and Exchange Commission on July 31, 1995.
File Nos.
33-44132
811-6481
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 7 (x)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9 (x)
FRANKLIN MUNICIPAL SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
{ } immediately upon filing pursuant to paragraph (b)
{ } on (Date), 1995 pursuant to paragraph (b)
{ } 60 days after filing pursuant to paragraph (a)(i)
{ } on (Date) pursuant to paragraph (a)(ii)
{X} on October 1, 1995 pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box
{ } This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to
Section 24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2
Notice for the issuer's most recent fiscal year was filed on July 27, 1995.
FRANKLIN MUNICIPAL SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Arkansas Municipal Bond Fund,
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund)
<TABLE>
<CAPTION>
N-1A Location in
Item No. Item Registration Statement
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial Information "Financial Highlights"; "Performance"
4. General Description of "About the Trust"; "Investment Objective
Registrant and Policies of the Funds"; "General
Information"
5. Management of the Fund "Management of the Trust";
"Portfolio Operations"
5A. Management's Discussion of Fund Contained in Registrant's Annual Report
Performance to Shareholders
6. Capital Stock and Other "Distributions to Shareholders";
Securities "Taxation of the Funds and Their
Shareholders"; "General Information"
7. Purchase of Securities Being "Management of the Trust"; "How To Buy
Offered Shares of Each Fund"; "Valuation of
Shares of Each Fund"
8. Redemption or Repurchase "Exchange Privilege";
"How To Sell Shares of Each Fund";
"Telephone Transactions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUNICIPAL SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin California High Yield Municipal Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial Information "Financial Highlights"; "Performance"
4. General Description of "About the Trust"; "Investment Objective
Registrant and Policies of the Fund"; "General
Information"
5. Management of the Fund "Management of the Fund";
"Portfolio Operations"
5A. Management's Discussion of Fund Contained in Registrant's Annual Report
Performance to Shareholders
6. Capital Stock and Other "Distributions to Shareholders";
Securities "Taxation of the Fund and Its
Shareholders"; "General Information"
7. Purchase of Securities Being "Management of the Fund"; "How To Buy
Offered Shares of the Fund"; "Valuation of Shares
of the Fund"
8. Redemption or Repurchase "Exchange Privilege";
"How To Sell Shares of the Fund";
"Telephone Transactions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUNICIPAL SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
10. Cover Page "Cover Page"
11. Table of Contents "Contents"
12. General Information and History "About The Trust", "Miscellaneous
Information"
13. Investment Objectives and "Each Fund's Investment Objectives and
Policies Policies"; "Description of Municipal and
Other Securities"; "Investment
Restrictions",
14. Management of the Registrant "Trustees and Officers"
15. Control Persons and Principal "Trustees and Officers"; "Miscellaneous
Holders of Securities Information"
16. Investment Advisory and Other "Investment Advisory and Other Services"
Services
17. Brokerage Allocation and Other "The Trust's Policies Regarding Brokers
Practices Used on Portfolio Transactions"
18. Capital Stock and Other "About the Trust"; "Miscellaneous
Securities Information"
19. Purchase, Redemption and "Additional Information Regarding Trust
Pricing of Securities Being Shares"; "Financial Statements"
Offered
20. Tax Status "Additional Information Regarding
Taxation"; "Miscellaneous Information"
21. Underwriters "The Trust's Underwriter"
22. Calculation of Performance Data "General Information"
</TABLE>
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
Financial Highlights
About the Trust
Investment Objective and
Policies of the Funds
Management of the Trust
Distributions to Shareholders
Taxation of the Funds
and Their Shareholders
How to Buy Shares of Each Fund
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of Each Fund
Telephone Transactions
Valuation of Shares of Each Fund
How to Get Information Regarding
an Investment in Each Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Special Factors Affecting
Each State Fund
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.
<TABLE>
<CAPTION>
ARKANSAS HAWAII TENNESSEE WASHINGTON
FUND FUND FUND FUND
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C>
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%
===== ===== ===== =====
</TABLE>
*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 following such investments. See "How to Sell Shares of Each Fund -
Contingent Deferred Sales Charge."
**Represents the amount 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.
***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.
<TABLE>
<CAPTION>
ONE YEAR* THREE YEARS FIVE YEARS TEN
<S> <C> <C> <C> <C>
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.
</TABLE>
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 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>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS DISTRIBUTIONS NET ASSET
PERIOD VALUE NET & UNREALIZED TOTAL FROM FROM NET FROM VALUE AT
ENDED BEGINNING INVESTMENT GAIN (lOSS) INVESTMENT INVESTMENT CAPITAL TOTAL END OF
MAY 31 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS PERIOD
- ------ --------- ----------- ------------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
1994(1) $10.00 $.01 $.050 $.060 $-- -- -- $10.06
1995 10.06 .51 .191 .701 (.441) -- (.441) 10.32
FRANKLIN HAWAII MUNICIPAL BOND FUND
1992(3) 10.00 .09 .158 .248 (.068) -- (.068) 10.18
1993 10.18 .63 .634 1.264 (.644) -- (.644) 10.80
1994 10.80 .62 (.459) .161 (.601) -- (.601) 10.36
1995 10.36 .60 .310 .910 (.600) -- (.600) 10.67
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
1994(1) 10.00 .01 .100 .110 -- -- -- 10.11
1995 10.11 .52 .353 .873 (.453) -- (.453) 10.53
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
1993(2) 10.00 .03 (.040) (.010) -- -- -- 9.99
1994 9.99 .51 (.464) .046 (.472) (.014) (.486) 9.55
1995 9.55 .56 .355 .915 (.565) -- (.565) 9.90
RATIOS/SUPPLEMENTAL DATA -----------------------------------------------------------------------------------
NET ASSETS RATIO OF RATIO OF NET
PERIOD AT END EXPENSES INVESTMENT INCOME PORTFOLIO
ENDED TOTAL OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
MAY 31 RETURN+ (IN 000'S) NET ASSETS++ NET ASSETS RATE
- ------ ------------ --------- --------- ---------- ------------
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
1994(1) .60% $2,213 .03%* 2.00%* --%
1995 7.27 4,134 .10 5.64 77.63
FRANKLIN HAWAII MUNICIPAL BOND FUND
1992(3) 8.96* 2,978 -- 4.55* --
1993 12.77 18,657 -- 5.95 48.70
1994 1.35 26,904 .05 5.76 31.35
1995 9.26 36,827 .20 6.02 22.88
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
1994(1) 1.10 2,224 .03* 1.89* 22.64
1995 8.97 5,986 .10 6.02 24.71
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
1993(2) (1.20)* 2,198 -- 3.44* --
1994 2.88 4,272 .05 5.59 39.52
1995 10.10 5,741 .10 6.13 18.46
* Annualized
(1)For the period May 10, 1994 (effective date of registration) to May 31, 1994.
(2)For the period May 3, 1993 (effective date of registration) to May 31, 1993.
(3)For 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
1994 1 1.20%*
1995 1.11
Franklin Hawaii Municipal Bond Fund
1992 3 1.57*
1993 1.06
1994 .92
1995 .87
Franklin Tennessee Municipal Bond Fund
1994 1 1.05*
1995 .92
Franklin Washington Municipal Bond Fund
1993 2 1.44*
1994 .71
1995 1.05
</TABLE>
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 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 total 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, 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. 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. In most cases, however, 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 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 of Trustees 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 of
Trustees. 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, although each Fund
currently intends to limit its lending of securities to no more than 5% of its
total assets. 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.
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 State 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 concentration of
their investments in the assets 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 of Trustees 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 $76 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 and 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 on a "net"
basis, that is, in principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. In the event that a 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 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 distribution plan (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 of Trustees 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 of Trustees. 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 a 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(Registered Trademark) 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. See "Purchases
at Net Asset Value" under "How to Buy Shares of Each Fund."
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 of total front-end sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER CONCESSION
AS A
AS A PERCENTAGE PERCENTAGE OF NET AS A PERCENTAGE
SIZE OF TRANSACTION OF OFFERING PRICE AMOUNT OF OFFERING PRICE*,***
AT OFFERING PRICE INVESTED
<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 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 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(Registered Trademark) 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 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 a Fund or its 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. In addition,
the aggregate investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered in determining
whether a reduced sales charge is available, even though there may be a number
of beneficiaries of the account. 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 of
Intent 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 dividends 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
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 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 also 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 payments 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. 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 the imposition of 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. 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 their own resources, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
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% (or applicable) 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 sales charge and a contingent deferred sales charge 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 a Fund by telephone by calling Investor Services at 1-800/632-2301 or
the automated Franklin TeleFACTS(Registered Trademark) 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
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. 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. 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 was transferred in from a fund on which the
investor paid a 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(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 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 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
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, as
described in the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt of a repurchase
order from the dealer, the Fund will still require a signed letter of
instruction and all other documents set forth above. 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 following their purchase, a contingent deferred sales charge will
be assessed, 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 discussed below.
In determining if 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 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 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
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
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: (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 even 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 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 of Trustees.
With 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(Registered Trademark) system at
1-800/247-1753, shareholders may obtain account information, current price and,
if applicable, 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, 73 for the Hawaii
Fund, 220 for the Tennessee Fund, and 76 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 to call. The same numbers may be used
when calling from a rotary phone.
<TABLE>
<CAPTION>
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
<S> <C> <C>
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.
</TABLE>
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 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. 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 Fund'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. Additional series may be added in
the future by the Board of Trustees.
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 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 of Trustees.
The Trust does not intend to hold annual shareholders meetings. The Trust may,
however, hold a special shareholders meeting for such purposes as changing
fundamental investment restrictions, 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.
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 check(s).
"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.
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.
Bob 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 STATE 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. The state is now moving toward a heavier
manufacturing base involving more sophisticated processes and products such as
electrical machinery, transportation equipment, fabricated metals and
electronics. Arkansas now has a higher percentage of workers involved in
manufacturing than the national average. The diversification of economic
interests has lessened the state's cyclical sensitivity to the impact of any
single sector.
Arkansas' diversified economic base is also reflected in the distribution of the
state's employment among the manufacturing, trade, service and governmental
sectors. During the past decade, there have been gains in the services and
wholesale and retail trade sectors.
Manufacturing continues to be a leading component of Arkansas' economy.
Manufacturing contributes over 25% of the total wage and salary component of
personal income. There is an almost equal division between durable and
nondurable goods. Non-manufacturing and non-agricultural goods provide a
balanced proportion of the overall economy and tend to insulate the state's
economy from any adverse economic conditions which affect manufacturing.
Agriculture is a significant and historical component of Arkansas' economy. Over
40% of the land in Arkansas is devoted to agriculture. Arkansas ranks first in
the nation in rice production, first in commercial broilers and fourth in
cotton.
Arkansas ranks first in the nation in the production of bauxite and bromine. The
state has significant natural gas and oil production in its west, central and
southern regions. There is also increased activity in the coal mining fields of
western Arkansas.
HAWAII
The state's historically strong tourism industry, which dominates its economy
and which began declining in 1991 and continued declining in 1992 and 1993, has
now begun to rebound. The number of visitors for the first four months of 1994
is up 3.4% from the same period in 1993. The number of visitors from the
continental U.S. was up 4.3% and from Japan and Asia, 1.7%.
Hawaii's population has grown about 0.7% faster than that of the nation for the
last 20 years. It's employment growth is usually faster and unemployment rate
lower than the rest of the U.S. However, unemployment is up, although the
state's rate remains well below the national average. The state's employment
growth has been weak during the last two years; in-migration and the growth of
the labor force has also slowed, which held down the rise in the unemployment
rate.
Hawaii's economy is linked to the economies of California and Japan, which are
the origins of many Hawaiian visitors and which are slowly recovering from
economic recessions in recent years.
TENNESSEE
The Tennessee economy has outpaced the nation for the last four 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. 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 35th in the nation.
From the second quarter of 1990 through 1992 the state led the nation in wage
rate growth. Currently, services, trade and manufacturing each account for
approximately 23% of the state's nonagricultural employment.
The unemployment rate has been rising steadily (from 5.1% in 1989 to 6.4% in
1993). Manufacturing employment growth is expected to continue to decline, but
the transportation equipment industry should continue to add new jobs, and the
number of automobile suppliers should grow as well. It is anticipated that the
unemployment rate should decline to approximately 5% by 1998.
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.
Employment grew modestly during the first quarter of 1994. The seasonally
adjusted unemployment rate improved from 6.2% to 5.9% of the labor force. Real
personal income rose by 2.0% in 1993, substantially slower than the 5.5% gain
recorded in 1992.
Looking ahead, however, a much slower pattern of growth is projected for the
next few years with announced reductions in operations at Boeing, whose 100,000
employees represent about 5% of the state's employment. Boeing has reduced its
Washington workforce by 15,000 and it is expected there will be 5,000 additional
reductions. Other sectors of the economy are strong and are adding jobs at rates
that are offsetting aerospace contraction.
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 state
income taxes by investing in lower-rated or unrated municipal securities. The
Fund also seeks to provide a maximum level of income which is exempt from
California personal income taxes. There can be no assurance that the Fund's
investment objective 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 "GENERAL INVESTMENT RISK
CONSIDERATIONS - RISK FACTORS RELATING TO HIGH YIELDING, FIXED-INCOME
SECURITIES."
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 further 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
Financial Highlights
About the Trust
Investment Objectives and Policies
of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Shares of the Fund
How to Get Information Regarding
an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Appendix - Description of Municipal
Securities Ratings
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, including fees set by contract, payable for the
fiscal year ended May 31, 1995.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases 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%+
</TABLE>
*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 following 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. Given the Fund's maximum initial sales charge and the rate of
the Fund's Rule 12b-1 fee, however, it is estimated that this would take a
substantial number of years.
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 such 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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$51 $69 $89 $146
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE 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 Fund'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 ASSET NET REALIZED OR TOTAL BUTIONS FROM
PERIOD VALUE INVEST- UNREALIZED FROM FROM NET REALIZED
ENDED BEGINNING MENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL
MAY 31 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993** $10.00 $ .03 $(.060) $(.030) $ -- $ --
1994 9.97 .53 (.199) .331 (.558) (.013)
1995 9.73 .66 .176 .836 (.636) --
</TABLE>
<TABLE>
<CAPTION>
NET ASSET NET ASSETS RATIO OF
PERIOD VALUE AT END EXPENSES NET INCOME PORTFOLIO
ENDED TOTAL AT END TOTAL OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
MAY 31 DISTRIBUTION OF PERIOD RETURN+ (IN 000's) NET ASSETS++ NET ASSETS RATE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993** $ -- $9.97 (3.60)%* $ 2,245 -- 3.85%* 8.89%
1994 (.571) 9.73 3.22 31,938 .07% 6.14 40.74
1995 (.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, a Delaware business trust
organized on November 19, 1991 and registered with the SEC as an open-end
management investment company, commonly called a "mutual fund," under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund and the
other separate 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 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 Shares of the Fund") 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.
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 attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its total 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 system. 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.
In addition, 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. 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.
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, 1994, the Fund had derived 32.55% 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 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 of Trustees 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 of Trustees. 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.
GENERAL 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 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 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 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
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 period.
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 does 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.
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 Shares of the Fund.")
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 issuers (excluding short-term securities and
cash equivalents) in the Fund's portfolio were in default. 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 Fund may retain an issue which has defaulted because such issue
may present an opportunity for subsequent price recovery. 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 under "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
As stated earlier, rating published by rating services such as S&P will be
considered in connection with the Fund's investments in bonds, although such
ratings will not be determinative. The table below shows the percentage invested
in each of the specific rating categories by an NRSRO and those that are not
rated by the NRSROs 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 composition based on month-end assets for each of the 12
months in the fiscal year ended May 31, 1995. The Appendix to the 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
B 0
CCC 0
CC 0
C 0
D 0
*These securities, which are unrated by an NRSRO, have been included in the
indicated rating categories.
HOW SHAREHOLDERS PARTICIPATE IN
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 of Trustees has the primary responsibility for the overall management
of the Fund 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
(113 separate series) with aggregate assets of over $76 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, fees totaling .62% of the average
monthly net assets of the Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented .88% of the average
monthly net assets of the Fund. Pursuant to the action by Advisers, the Fund
paid no management fees and total operating expenses of 0.20% of the average
monthly net assets of the Fund.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries 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.
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 of Trustees 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 Trustees. 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 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
another fund in the Franklin Group of Funds(Registered Trademark) or the
Templeton Group, 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, qualified as such
and intends to so qualify.
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 conditions.
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 Shares of the Fund."
Set forth below is a table of total front-end sales charges or underwriting
commissions and dealer concessions.
<TABLE>
<CAPTION>
......... TOTAL SALES CHARGE
------------------
SIZE OF TRANSACTION AT AS A PERCENTAGE OF OFFERING AS A PERCENTAGE OF NET DEALER CONCESSION AS A
OFFERING PRICE PRICE AMOUNT INVESTED PERCENTAGE OF OFFERING
PRICE*, ***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 2.15% 2.20% 2.00%
but less than
$1,000,000
$1,000,000 none none (see below)**
or more
</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 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(Registered Trademark) 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 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 Fund 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. In addition,
the aggregate investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered in determining
whether a reduced sales charge is available, even though there may be a number
of beneficiaries of the account. 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 Group 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 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 dividends 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 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 also 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 payments 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 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 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 Class I shares of another of the Franklin Templeton Funds
may be purchased at net asset value and without the imposition of 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. 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 their own resources, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
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 Shareholder 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 fund in the Franklin Group of Funds or the
Templeton Group, 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% (or applicable) 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
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. 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. 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 Statement of Additional Information.
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, interest-bearing 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 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.
he Fund currently will not accept investments from Timing Accounts.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) makes more than two exchanges out of the Fund per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
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 by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
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. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all other
documents set forth above. 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 following 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; 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 for: exchanges; any account fees;
distributions to participants or their beneficiaries in Trust Company individual
retirement plan accounts due to death, disability or attainment of age 59 1/2;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination or
plan transfer; 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
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: (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 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 SHARES OF THE FUND
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 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. 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 Trustees. With approval
of 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(Registered Trademark) system at
1-800/247-1753, shareholders may obtain account information, current price and,
if applicable, yield or other performance information specific to the 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.
<TABLE>
<CAPTION>
HOURS OF OPERATION
DEPARTMENT NAME TELEPHONE NO. (PACIFIC TIME)
<S> <C> <C>
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.
</TABLE>
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 and the
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 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 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. 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 Statement of Additional Information.
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. Additional series may be added in
the future by the Board of Trustees.
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 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 of Trustees.
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. 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.
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.
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 the owner's
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.
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 Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, 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.
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
OCTOBER 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
About the Trust
Each Fund's Investment Objective
and Policies
Description of Municipal and
Other Securities
Investment Restrictions
Trustees and Officers
Investment Advisory and Other Services
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Additional Information
Regarding Fund Shares
The Trust's Underwriter
Additional Information Regarding Taxation
General Information
Miscellaneous Information
Appendix A - Further Information on Special
Factors Affecting Each State Fund
Appendix B - Description of Municipal
Securities Ratings
Financial Statements
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 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 s which pay interest exempt such
state's personal income taxes (if any) and regular federal income taxes.
Each Fund's (except the Franklin California High Yield Municipal Fund (the
"California High Yield 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 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 listed 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 PROSPECTUS.
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 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. The California Fund may invest up to 5% of its assets
(at the time of purchase) in defaulted securities.
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
The 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.
CERTIFICATES OF PARTICIPATION. As stated in the Prospectus, each Fund may also
invest in municipal lease obligations, primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that the
lease which is the subject of the transaction typically contains 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.
While the risk of nonappropriation is inherent to COP 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 (except
for the California Fund which may invest in securities rated in any category),
or in unrated COPs believed to be of comparable quality. Critereia considered by
the ratings agencies and the investment manager in assessing such risk include
the issuing municipality's credit rating, the essentiality of the leased
property to the municipality and the term of the lease compared to the useful
life of the leased property. The Board of Trustees has determined that COPs held
in each Fund's portfolio 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; (b) the size of the municipal securities market for each Fund, both
in general and with respect to COPs; and (c) the extent to which the type of
COPs held by each Fund trade on the same basis and with the same degree of
dealer participation as other municipal bonds of comparable credit rating or
quality. There is no limit as to the amount of assets which each Fund may invest
in COPs.
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 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)
1045 Sansome St.
San Francisco, CA 94111
Trustee
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)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
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 42 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, 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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board 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 56 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
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)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck 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)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
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 52 of the investment companies in the Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare
Investors; and formerly President, National Association of Securities Dealers,
Inc.
Hayato Tanaka (78)
277 Haihai Street
Hilo, HI 96720
Trustee
Retired, former owner of The Jewel Box Orchids;and director or trustee, as the
case may be, of two of the investment companies in the Franklin Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial 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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, 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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
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)
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal 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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Edward V. McVey
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin/Templeton Distributors,
Inc.; and officer of many of the investment companies in the Franklin Group of
Funds.
Charles E. Johnson
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin/Templeton Distributors, Inc.; President, Franklin
Institutional Services Corporation; President and Director, Templeton Worldwide,
Inc.; Vice President, Franklin Advisers, Inc.; director of certain of the
investment companies in the Templeton Group of Funds; officer and/or director,
as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and
Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of some of the investment companies in the Franklin Group of Funds.
Thomas J. Kenny
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of some of the
investment companies in the Franklin Group of Funds.
Kenneth V. Domingues
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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 all the investment companies in
the Franklin Group of Funds.
Deborah R. Gatzek
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin/Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of all
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(R) 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 THE
FRANKLIN TEMPLETON GROUP OF
TOTAL FEES RECEIVED FROM FUNDS ON WHICH EACH SERVES**
THE FRANKLIN TEMPLETON
GROUP OF FUNDS*
NAME
<S> <C> <C>
Frank H. Abbott, III $176,870 30
Harris J. Ashton 319,925 54
S. Joseph Fortunato 336,065 56
David Garbellano 153,300 29
Frank W.T. LaHaye 150,817 25
Gordon S. Macklin 303,685 51
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
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 112 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
Fund. (Registered Trademark) 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. For
additional information concerning director compensation and expenses, please see
the Trust's Annual Report to Shareholders.
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 ("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 $114 billion in
assets for over 3.8 million shareholders. The preceding table indicates those
officers and trustees who are also affiliated persons of Distributors and
Advisers.
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 activities are subject
to the review and supervision of the trustees to whom the Manager renders
periodic reports of each Fund's investment activities. The Manager, at its own
expense, furnishes the Trust with 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. Each Fund
bears all of its expenses not assumed by the Manager. See the Statement of
Operations in the financial statements included in the Trust's Annual Report to
Shareholders for additional details of these expenses.
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 not impose its management fees and to make
payment of certain operating expenses of the Funds. This action by the Manager
to not impose its management fees and to make payment of the expenses related to
the operations of the Funds may be terminated by the Manager at any time. 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
2.5% 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 1.5% 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 which each
Fund was contractually obligated to pay the Manager and the management fees
actually paid by each Fund for the fiscal years ended May 31, 1993, 1994, and
1995.
<TABLE>
<CAPTION>
1995 CONTRACTUAL MANAGEMENT
MANAGEMENT FEES PAID
FEES BY THE FUND
<S> <C> <C>
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 CONTRACTUAL MANAGEMENT
MANAGEMENT FEES PAID
FEES 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 CONTRACTUAL MANAGEMENT
MANAGEMENT FEES PAID
FEES 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
</TABLE>
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), 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
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 lawful and appropriate to do so, the Manager or 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 fiscal years ended May 31, 1993, 1994 and 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) to
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 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.
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 close 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.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close 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 closing of the Exchange
(generally 1:00 p.m. Pacific time 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
The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. Th .
The processing date for the reinvestment of dividends may vary from monthto
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 Trust and Institutional Services Division of Distributors 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.
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.
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.
Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission to the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such reinvestment will be
at net asset value.
In connection with the offering of the Funds' shares, aggregate underwriting
commissions received by Distributors and the amounts retained after payments to
dealers for each of the last three fiscal years ending on May 31, 1993, 1994 and
1995 were as follows:
<TABLE>
<CAPTION>
1995 TOTAL TOTAL
COMMISSIONS COMMISSIONS
RECEIVED RETAINED
<S> <C> <C>
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
</TABLE>
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 (1/15
of 1%) 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' by the trustees, including those trustees who are
not interested persons, as defined in the 1940 Act. The Plans for the Hawaii,
California and Washington Funds are effective through March 31, 1995. The Plans
for the Arkansas and Tennessee Funds are initially effective through May 9,
1995. 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 the 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 Prospectus, 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 twelve-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 Franklin/Templeton Group (defined under "How to Buy Shares
of Each Fund") 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 Prospectus, 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
charge is deducted from the initial $1,000 purchase order, 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 charge in effect currently.
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. The average annual
compounded rates of return for the Fund for the indicated periods ended on May
31, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
INCEPTION ONE- FROM
OF THE FUND YEAR INCEPTION
<S> <C> <C> <C>
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%
</TABLE>
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 Prospectus, 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.
<TABLE>
<CAPTION>
AGGREGATE
TOTAL RETURN
INCEPTION ONE- FROM
OF THE FUND YEAR INCEPTION
<S> <C> <C> <C>
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%
</TABLE>
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 average, over a specified period of
time. The 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(Registered Trademark) 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' portfolio, 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 $125
billion in assets under management for more than 3.8 million shareholder
accounts and offers 115 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
ARKANSAS FUND OF SHARES PERCENTAGE
<S> <C> <C>
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
</TABLE>
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
From 1980-1990, Arkansas has had a 3.0% increase in population. Little
Rock-North Little Rock, which has a population of over a half million, is
centrally located in Arkansas and serves as a major transportation, governmental
and industrial center of the state. Little Rock is home to the largest regional
airport in the state and also home to the University of Arkansas for Medical
Sciences, a comprehensive health center with five colleges - Medicine, Nursing,
Pharmacy, Health Related Professions and a Graduate School.
Arkansas has shifted to a more diversified economic level, with less emphasis on
agriculture and a stronger emphasis on manufacturing, a leading component of the
state's economy, contributing approximately 25% of the total wage and salary
component of personal income.
Employment distribution is fairly balanced between the state's four largest
non-agricultural industries: Manufacturing (25%), Wholesale and Retail Trade
(21.7%), Services (21.3%) and Government (18.0%), therefore reducing economic
risk to the state as a whole. The state's manufacturing expanded considerably in
the 1960's and 1970's, contributing to a reversal of population losses
experienced in earlier decades. Resource related industries dominate and the
largest employers are the food product, lumber and paper goods industries. The
agricultural sector, though much diminished in importance, remains a significant
contributor to state income.
Chief products are poultry, rice and soybeans.
The state unemployment rate had been declining from its peak of more than 10% in
1983 to 6.9% in 1990 and has been increasing since that year as a result of
national recessionary pressures; 1992 average unemployment was 7.2%, but the
rate is expected to remain below 7% for the rest of the decade. Most of the
state's economic data such as personal income, wages and salaries, total
employment, population and housing starts have reflected growth trends in
general and are expected to continue to do so going forward. Income per capita,
at $15,439, is 78% of the national average and has maintained its relative
position despite economic growth trends.
The Constitution of the state does not limit the amount of general obligation
bonds which may be issued by the state; however, no such bonds may be issued
unless approved by the voters of the state at a general election or a special
election held for that purpose.
There is no constitutional limitation on the aggregate principal amount of
revenue bonds that may be issued by the state and its agencies. All revenue
bonds and notes are secured only by specific revenue streams and neither the
general revenues of the state nor its full faith and credit are pledged to
repayment.
In 1973, the state established the Revenue Stabilization Law (the "Act") which
governs the administration and distribution of state Revenues. The General
Assembly must enact legislation pursuant to this Act to provide for an allotment
process of funding appropriations in order to comply with state law prohibiting
deficit spending whereby spending is limited to actual revenues received by the
state. The governor may restrict spending to a level below the level of
appropriations.
Pursuant to the Stabilization Act, the General Assembly establishes three levels
of priority for general revenue spending, levels "A," "B," and "C." Successive
levels of appropriation are funded only in the event sufficient revenues have
been generated to fully fund any prior level. Accordingly, appropriations made
to programs and agencies are only maximum authorization to spend. Actual
expenditures are limited to the lesser of (i) moneys flowing into a program or
agencies' fund maintained by the Treasurer or (ii) the maximum appropriation by
the General Assembly.
Audited results show that Arkansas' revenues slightly exceeded expenditures
during fiscal years 1987 through 1992. Revenues exceeded distributions by $413
million for fiscal year 1993. Principal revenue sources are sales and use taxes
(36% of revenues), individual income taxes (34%), motor fuels tax (10%) and
corporate income taxes (5.4%). The state prepares financial plans on a biennial
basis and has adopted a $2.3 billion budget for fiscal year 1994.
Since state revenues are not collected throughout the year in a pattern
consistent with the program and agency expenditures, the Budget Stabilization
Trust, which receives one-half of the interest earnings from state fund
investments, has been established and is utilized to assure proper cash flow
during any period. Other interest earnings are pledged to special revenue
obligations or used to supplement the state's capital construction program.
A settlement reached in 1989 in a desegregation case involving the Little Rock
School District is projected to cost the state $131 million over a ten-year
period, with the bulk of the outlays expected in the first five years. These
additional outlays coincide with settlement of an earlier court case involving a
magnet school program in three central Arkansas school districts, projected to
cost $98 million over ten years. Fiscal year 1990 marked the peak year of
increased state outlays for these programs, with expenditures of $33.4 million;
another $24.7 million was spent in fiscal 1991. For the last biennium, the state
budgeted $31.6 million and $26.8 million.
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.
With the apparent onset of recovery in California's economy, revenue growth over
the next few years could recommence at levels that would enable California to
restore fiscal stability. The political environment, however, combined with
pressures on the state's financial flexibility, may frustrate its ability to
reach this goal. Strong interests in long-established state programs ranging
from low-cost public higher education access to lofty welfare and health
benefits join with the more recently emerging pressure for expanded prison
construction and a heightened awareness and concern over the state's business
climate.
Adopted on July 8, 1994, the fiscal 1995 budget is designed to address
California's accumulated deficit over a 22-month period. In order to balance the
budget and generate sufficient cash to retire the $4 billion deficit Revenue
Anticipation Warrant and a $3 billion Revenue Anticipation Note to be issued in
July 1995, the state's fiscal plan relies upon aggressive assumptions of federal
aid, projected at about $760 million in fiscal year 1995 and $2.8 billion in
fiscal year 1996, to compensate the state for its costs of providing services to
illegal immigrants. These assumptions, combined with fiscal year 1996
constitutionally mandated increases in spending for K-14 education, and
continued growth in social services and corrections expenditures, are risky. To
offset this risk, the state has enacted a Budget Adjustment Law, known as the
"trigger" legislation, which establishes a set of backup budget adjustment
mechanisms to address potential shortfalls in cash. The trigger mechanism will
be in effect for both fiscal years 1995 and 1996.
In July of 1994, S&P and Moody's lowered the state's general obligation bond
rating. The rating agencies explained their actions by citing the state's
continuing deferral of substantial portions of its estimated $3.8 billion
accumulated deficit; continuing structural budgetary constraints including a
funding guarantee for K-14 education; overly optimistic expectation of federal
aid to balance fiscal year 1995's budget and fiscal year 1996's cash flow
projections; and reliance upon a trigger mechanism to reduce spending if the
plan's federal aid assumptions prove to be inflated.
HAWAII
Until recently, revenue growth outpaced expenditures, averaging 11% annually.
Increased spending pressures have caused this number to drop to 3% during the
state's 1989-90 fiscal year. Hawaii's general excise taxes and license fees
account for 42% of its total revenues, followed by individual and corporate
income taxes (27.4% and 3%, respectively). Until 1981, real property taxes were
collected by the state, but are now under each county's jurisdiction, averaging
between 15% and 17% of total revenues annually. A 1978 constitutional revision
provided that when the general fund balance exceeds 5% of revenues for two
consecutive years, tax credits are to be given to qualified residents. Pursuant
to this revision, $54 million was appropriated for the taxable year 1990.
Hawaii's debt levels are high relative to other states, due in large part to
high development and strong centralized government. Although gross debt has
risen rapidly, debt ratios other than per capita income, have declined,
reflecting the state's growth.
The economy of Hawaii is different from the rest of the U.S. Tourism and its
related business activities dominate the state's economy and therefore,
transportation, retailing and lodging, as well as the food industry, are more
important to Hawaii than in the U.S. Construction is also important because of
the state's growing population. In the 1980s construction activity increased
upon the insurgence of Japanese investment in Hawaii and after experiencing many
years of lower vacancy rates than the rest of the nation, the economy began
declining and vacancy rates increased sharply.
Although Hawaii's economy has been in recession for most of the last two years,
housing activity is rebounding. The median existing home price rose from
approximately $130,000 in 1980 to $370,000 in 1990. In the last few years,
however, prices have stabilized. This, along with the mortgage rate decline, has
improved affordability dramatically.
TENNESSEE
In 1978, the voters of the state of Tennessee approved an amendment to the state
Constitution requiring that (1) the total expenditures of the state for any
fiscal year shall not exceed the state's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year shall the rate of growth of appropriations from state tax revenues
exceed the estimated rate of growth of the state's economy. In the past the
governor and the General Assembly have had to restrict expenditures to comply
with the state Constitution.
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, general fund
revenues are expected to exceed estimates of about 4% nominal growth and lead to
another year of surplus.
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. Also included in the state's budget
initiatives for fiscal 1994-1995 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.
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.
Although major programs in the capital budget are near completion, particularly
for state universities and correctional facilities, the state has limited debt
issuance through the use of operating funds. Tennessee's outstanding G.O.
indebtedness is $790 million. Overall debt remains low at $648 per capita, while
direct debt is extremely low at $157. Future capital needs are small and include
funds for a bicentennial mall and highway improvements. The state is in a
surplus position in funding its pension liabilities.
The Tennessee economy is largely based on manufacturing. The expansion of the
Saturn and Nissan automotive facilities and related suppliers is believed to
demonstrate the continuing vitality of manufacturing in the state. Other
important segments of the state economy include the wholesale and retail trade,
service industries and the government sector. Within the service sector, health
care and product distribution services are taking a leading role. There can be
no assurance that Tennessee's relatively favorable economic performance will
continue.
WASHINGTON
In response to Boeing's announcement regarding reductions in its Washington
operations, the state is faced with economic and fiscal challenges. Boeing
employs approximately 100,000 people in Washington, representing about 5% of
employment in the state. The company has reduced its workforce by 15,000 with
5,000 in additional reductions expected.
Although the state's fiscal management procedures performed well in response to
the recent national recession, it will be tested more seriously as the impact of
the Boeing contraction is felt. The state, in response to the Boeing
announcements, promptly lowered its revenue forecasts and enacted a 1993-95
biennial budget aimed to enhance reserve levels and bring spending and revenue
back into balance.
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 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 is $16.3 billion, up 6% over the
1991-1993 biennium. 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 federal
revenue, which includes an expansion of the sales tax base to include selected
business services and an increase in the business and occupation tax rate. On
April 6, 1994, the governor signed a supplemental budget, which includes $168
million of additional spending for various one-time items, including grants to
local school districts. The state now expects to end the biennium with $289
million in the general fund and budget stabilization fund. 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 1993-95 biennial budget
debate.
In November 1993, voters approved Initiative 601, which will limit state
spending increases to the rate of inflation and population growth beginning with
the 1995-1997 biennium. Estimates indicate a spending cap of $17.7 billion for
the next biennium, an increase of 8.2% from the current budget.
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 financial statements contained in the Annual Report to Shareholders of the
Trust dated May 31, 1995 are incorporated herein by reference.
FRANKLIN MUNICIPAL SECURITIES TRUST
File Nos. 33-44132 & 811-6481
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
(a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholder, dated May 31, 1995 as
filed with the SEC on Form Type N-30D on July 27, 1995
(i) Report of Independent Auditors - June 30, 1995.
(ii) Statement of Investments in Securities and Net Assets - May
31, 1995.
(iii)Statements of Assets and Liabilities - May 31, 1995.
(iv) Statements of Operations - for the year ended May 31, 1995.
(v) Statements of Changes in Net Assets - for the years ended
May 31, 1995 and May 31, 1994 (except as noted).
(b) Exhibits:
The following exhibits, are attached herewith, except exhibits 6(ii),
8(ii), 8(iii), 15(i), 15(ii), 15(iii) and 15(iv) which are
incorporated by reference as noted.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated December 10, 1991
(ii) Certificate of Trust dated December 10, 1991
(iii)Certificate of Amendment to Certificate of Trust dated May
14, 1992
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws of the Franklin Municipal Securities Trust
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
N/A
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
N/A
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated February 26, 1992
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc. dated
April 23, 1995
(ii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 17 to
Registration Statement on
Form N-1A
File No. 2-75925
Filing Date: March 28, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof;
N/A
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
renumeration;
(i) Custodian Agreement between Registrant and Bank of America
NT & SA dated February 26, 1992
(ii) Custodian Agreements between Registrant and Citibank
Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposits and
Disbursements of Funds
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to
Registration on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iii)Amendment to Custodian Agreement between Registrant and Bank
of America NT & SA dated December 1, 1994 is Incorporated by
Reference to:
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to
Registration on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
N/A
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
N/A
(11) copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
registration statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
N/A
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding dated February 11, 1992 and March 6,
1992
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
N/A
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Amended and Restated Distribution Plan dated July 1, 1993
for Franklin Washington Municipal Bond Fund
Filing: Post-Effective Amendment No. 2 to
Registration Statement of
Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: March 3, 1993
(ii) Amended and Restated Distribution Plan dated July 1, 1993
for Franklin Hawaii Municipal Bond Fund
Filing: Post-Effective Amendment No. 3 to
Registration Statement of
Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: April 30, 1993
(iii)Amended and Restated Distribution Plan dated July 1, 1993
for Franklin California High Yield Municipal Fund
Filing: Post-Effective Amendment No. 3 to
Registration Statement of
Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: April 30, 1993
(iv) Amended and Restated Distribution Plan dated May 10, 1994
for Franklin Arkansas Municipal Bond Fund and Franklin
Tennessee Municipal Bond Fund
Filing: Post-Effective Amendment No. 5 to
Registration Statement of
Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: March 11, 1994
(16) schedule for computation of each performance quotation provided
in the registration statement in response to Item 22 (which need
not be audited).
(i) Schedule for computation of performance quotation
(17) Power of Attorney
(i) Power of Attorney dated March 15, 1995
(ii) Certificate of Secretary dated March 15, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule
18f-3 under the 1940 Act.
N/A
(27) Financial Data Schedule Computation
(i) Financial Data Schedule - Franklin Arkansas Municipal Bond
Fund
(ii) Financial Data Schedule - Franklin California High Yield
Municipal Fund
(iii)Financial Data Schedule - Franklin Hawaii Municipal Bond
Fund
(iv) Financial Data Schedule - Franklin Tennesse Municipal Bond
Fund
(v) Financial Data Schedule - Franklin Washington Municipal Bond
Fund
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of May 31, 1995, the number of record holders of each class of
securities of the Registrant were as follows:
Number of
Title of Class Record Holders
Shares of Beneficial
Interest Franklin Municipal
Securities Trust
Franklin California High Yield Fund 1,114
Franklin Hawaii Municipal Bond Fund 912
Franklin Washington Municipal Bond Fund 148
Franklin Arkansas Municipal Bond Fund 88
Franklin Tennessee Municipal Bond Fund 101
Item 27 Indemnification
See Article III, Section 7 and Article VII, Section 2 of the Agreement and
Declaration of Trust (Exhibit No. 1(i)) and Article VI of the By-Laws (Exhibit
No. 2) of Registrant.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue. See also Section Article VI of the By-Laws of the Trust and Section
16 of the Distribution Agreement, filed herewith.
Item 28 Business and Other Connections of Investment Adviser
The officers and directors of the Registrant's investment advisor also serve as
officers and/or directors for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Group of
Funds. In addition, Messrs. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B.
Item 29 Principal Underwriters
a) Distributors also acts as principal underwriter of shares of AGE High Income
Fund, Inc., Franklin California Tax-Free Income Fund, Inc., Franklin Custodian
Funds, Inc., Franklin Gold Fund, Franklin Equity Fund, Franklin Premier Return
Fund, Franklin New York Tax-Free Income Fund, Inc., Franklin California Tax-Free
Trust, Franklin Investors Securities Trust, Franklin Tax-Free Trust, Franklin
New York Tax-Free Trust, Franklin Strategic Series, Franklin International
Trust, Franklin Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged
U.S. Government Securities Fund, Franklin Tax-Advantaged High Yield Securities
Fund, Franklin Managed Trust, Franklin Balance Sheet Investment Fund, Franklin
Federal Tax-Free Income Fund, Institutional Fiduciary Trust, Franklin Money
Fund, Franklin Federal Money Fund, Franklin Tax Exempt Money Fund, Franklin Real
Estate Securities Trust, Templeton Variable Products Series Fund, Templeton Real
Estate Securities Fund, Templeton Growth Fund, Inc., Templeton Funds, Inc.,
Templeton Smaller Companies Growth Fund, Inc., Templeton Income Trust, Templeton
Global Opportunities Trust, Templeton Institutional Funds, Inc., Templeton
American Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton
Developing Markets Trust, Templeton Global Investment Trust, Templeton Variable
Annuity Fund, and Franklin Templeton Japan Fund.
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Trust or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
The Registrant hereby undertakes to comply with the information requirements in
Item 5A of the Form N-1A by including the required information in the Trust's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
31st day of July 1995.
FRANKLIN MUNICIPAL SECURITIES TRUST
By: Rupert H. Johnson, Jr. *
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Rupert H. Johnson, Jr.* Trustee and Principal
Rupert H. Johnson Executive Officer
Dated: July 31, 1995
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: July 31, 1995
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: July 31, 1995
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: July 31, 1995
Harris J. Ashton* Trustee
Harris J. Ashton Dated: July 31, 1995
Harmon E. Burns* Trustee
Harmon E. Burns Dated: July 31, 1995
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: July 31, 1995
David W. Garbellano* Trustee
David W. Garbellano Dated: July 31, 1995
Charles B. Johnson * Trustee
Charles B. Johnson Dated: July 31, 1995
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: July 31, 1995
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: July 31, 1995
Hayato Tanaka* Trustee
Hayato Tanaka Dated: July 31, 1995
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
FRANKLIN MUNICIPAL SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration
of Trust dated
December 10, 1991 Attached
EX-99.B1(ii) Certificate of Trust
dated December 10, 1991 Attached
EX-99.B1(iii) Certificate of Amendment
dated May 14, 1992 Attached
EX-99.B2(i) By-Laws of the Franklin
Municipal Securities Trust Attached
EX-99.B5(i) Management Agreement
between Registrant and
Franklin Advisors, Inc.
dated February 26, 1992 Attached
EX-99.B6(i) Amended and Restated
Distribution Agreement
between Registrant and
Franklin/Templeton
Distributors, Inc. dated
April 23, 1995 Attached
EX-99.B6(ii) Form of Dealer Agreement between
Franklin Templeton Distributors,
Inc. and securities dealers *
EX-99.B8(i) Custodian Agreement
between Registrant and
Bank of America NT & SA
dated February 26, 1992 Attached
EX-99.B8(ii) Custodian Agreements
between Registrand and
Citibank Delaware *
EX-99.B8(iii) Amendment to Custodian
Agreement between Registrant
and Bank of America NT & SA
dated December 1, 1994 *
EX-99.B11(i) Consent of Independent
Auditors dated July 26, 1995 Attached
EX-99.B13(i) Letter of Understanding
dated February 11, 1992
and March 6, 1992 Attached
EX-99.B15(i) Amended and Restated
Distribution Plan dated
July 1, 1993, for Franklin
Washington Municipal
Bond Fund *
EX-99.B15(ii) Amended and Restated
Distribution Plan dated
July 1, 1993, for Franklin
Hawaii Municipal Bond Fund *
EX-99.B15(iii) Amended and Restated
Distribution Plan dated
July 1, 1993 for Franklin
California High Yield
Minicipal Fund *
EX-99.B15(iv) Amended and Restated
Distribution Plan dated
May 10, 1994 for Franklin
Arkansas Municipal Bond Fund
and Franklin Tennessee
Municipal Bond Fund *
EX-99.B16(i) Schedule for Computation
of Performance Quotation Attached
EX-99.B17(i) Power of Attorney dated
March 15, 1995 Attached
EX-99.B17(ii) Certificate of Secretary
dated March 15, 1995 Attached
EX-27.B(i) Financial Data Schedule
for Franklin Arkansa Municipal
Bond Fund Attached
EX-27.B(ii) Finacial Data Schedule
for Franklin California
High Yield Municipal Fund Attached
EX-27.B(iii) Financial Data Schedule
for Franklin Hawaii Municipal
Bond Fund Attached
EX-27.B(iv) Financial Data Schedule for
Franklin Tennesse Municipal
Bond Fund Attached
EX-27.B(v) Financial Data Schedule for
Franklin Washington
Municipal Bond Fund Attached
* Incorporated by Reference
AGREEMENT AND DECLARATION OF TRUST
of
FRANKLIN MUNICIPAL SECURITIES TRUST
a Delaware Business Trust
Principal Place of Business:
777 Mariners Island Boulevard
San Mateo, California 94404
TABLE OF CONTENTS
ARTICLE I
Name and Definitions
Section 1. Name
Section 2. Definitions
(a) Trust
(b) Trust Property
(c) Trustees
(d) Shares
(e) Shareholder
(f) Person
(g) 1940 Act
(h) Commission and Principal
Underwriter
(i) Declaration of Trust
(j) By-Laws
(k) Interested Person
(l) Investment Manager
(m) Series
ARTICLE II
Purpose of Trust
ARTICLE III
Shares
Section 1. Division of Beneficial Interests
Section 2. Ownership of Shares
Section 3. Investments in the Trust
Section 4. Status of Shares and Limitation of
Personal Liability
Section 5. Power of Board of Trustees to Change
Provisions Relating to Shares
Section 6. Establishment and Designation of Shares
(a) Assets Held with Respect to a
Particular Series
(b) Liabilities Held with Respect to a
Particular Series
(c) Dividends, Distributions, Redemptions,
and Repurchases
(d) Voting
(e) Equality
(f) Fractions
(g) Exchange Privilege
(h) Combination of Series
(i) Elimination of Series
Section 7. Indemnification of Shareholders
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure
Section 2. Effect of Death, Resignation, etc. of
a Trustee
Section 3. Powers
Section 4. Payment of Expenses by the Trust
Section 5. Payment of Expenses by Shareholders
Section 6. Ownership of Assets of the Trust
Section 7. Service Contracts
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers
Section 2. Voting Power and Meeting
Section 3. Quorum and Required Vote
Section 4. Action by Written consent
Section 5. Record Dates
Section 6. Additional Provisions
ARTICLE VI
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net
Income, and Distributions
Section 2. Redemptions and Repurchases
Section 3. Redemptions at the Option of the
Trust
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation
Section 2. Indemnification and Limitation of
Liability
Section 3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety
Section 4. Insurance
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing
with Trustees
Section 2. Termination of Trust of Series
Section 3. Merger and Consolidation
Section 4. Amendments
Section 5. Filing of Copies, References,
Headings
Section 6. Applicable Law
Section 7. Provisions in Conflict with Law or
Regulations
Section 8. Business Trust Only
Section 9. Use of the name "Franklin"
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN MUNICIPAL SECURITIES TRUST
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder for
the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate
of Trust be filed with the Office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders of
Shares in this Trust.
ARTICLE I.
Name and Definitions
Section 1. Name. This trust shall be known as FRANKLIN MUNICIPAL SECURITIES
TRUST and the Trustees shall conduct the business of the Trust under that name
or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;
(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust, including without limitation the rights referenced in Article
VIII, Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, and reference herein to a Trustee or the
Trustees shall refer to such person or persons in their capacity as trustees
hereunder;
(d) "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares;
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(g) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall
have the respective meanings given them in Section 2(a)(7) and Section
(2)(a)(29) of the 1940 Act;
(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time and incorporated herein by reference;
(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the 1940 Act;
(l) "Investment Manager" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV, Section
7(a) hereof;
(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III and shall
mean an entity such as that described in Section 18(f)(2) of the 1940 Act, and
subject to Rule 18f-2 thereunder.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities.
ARTICLE III.
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an unlimited number of
Shares, with a par value of $ .01 per Share. The Trustees may authorize the
division of Shares into separate Series and the division of Series into separate
classes of Shares. The different Series shall be established and designated, and
the variations in the relative rights and preferences as between the different
Series shall be fixed and determined, by the Trustees. If only one or no Series
(or classes) shall be established, the Shares shall have the rights and
preferences provided for herein and in Article III, Section 6 hereof to the
extent relevant and not otherwise provided for herein, and all references to
Series (and classes) shall be construed (as the context may require) to refer to
the Trust.
Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends, when, if and
as declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article VIII, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular (class of a) Series from the assets held with respect to such Series
according to the number of Shares of such (class of such) Series held of record
by such Shareholder on the record date for any dividend or distribution or on
the date of termination, as the case may be. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or any Series. The Trustees may from time to time
divide or combine the Shares of any particular Series into a greater or lesser
number of Shares of that Series without thereby materially changing the
proportionate beneficial interest of the Shares of that Series in the assets
held with respect to that Series or materially affecting the rights of Shares of
any other Series.
Section 2. Ownership of Shares. The ownership of Shares shall
be recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series
(or class). No certificates certifying the ownership of Shares shall be issued
except as the Board of Trustees may otherwise determine from time to time. The
Trustees may make such rules as they consider appropriate for the transfer of
Shares of each Series (or class) and similar matters. The record books of the
Trust as kept by the Trust or any transfer or similar agent, as the case may be,
shall be conclusive as to who are the Shareholders of each Series (or class) and
as to the number of Shares of each Series (or class) held from time to time by
each.
Section 3. Investments in the Trust. Investments may be
accepted by the Trust from such Persons, at such times, on such terms, and for
such consideration as the Trustees from time to time may authorize. Each
investment shall be credited to the individual Shareholder's account in the form
of full and fractional Shares of the Trust, in such Series (or class) as the
purchaser shall select, at the net asset value per Share next determined for
such Series (or class) after receipt of the investment; provided, however, that
the Trustees may, in their sole discretion, impose a sales charge upon
investments in the Trust.
Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving only the rights
provided in this instrument. Every Shareholder by virtue of having become a
Shareholder shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of said deceased Shareholder under this
Trust. Ownership of Shares shall not entitle the Shareholder to any title in or
to the whole or any part of the Trust Property or right to call for a partition
or division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor, except as specifically provided herein, to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares. Notwithstanding any other provisions of this Declaration of
Trust and without limiting the power of the Board of Trustees to amend the
Declaration of Trust as provided elsewhere herein, the Board of Trustees shall
have the power to amend this Declaration of Trust, at any time and from time to
time, in such manner as the Board of Trustees may determine in their sole
discretion, without the need for Shareholder action, so as to add to, delete,
replace or otherwise modify any provisions relating to the Shares contained in
this Declaration of Trust, provided that before adopting any such amendment
without Shareholder approval the Board of Trustees shall determine that it is
consistent with the fair and equitable treatment of all Shareholders or that
Shareholder approval is not otherwise required by the 1940 Act or other
applicable law. If Shares have been issued, Shareholder approval shall be
required to adopt any amendments to this Declaration of Trust which would
adversely affect to a material degree the rights and preferences of the Shares
of any Series (or class) or to increase or decrease the par value of the Shares
of any Series (or class).
Subject to the foregoing Paragraph, the Board of Trustees may
amend the Declaration of Trust to amend any of the provisions set forth in
paragraphs (a) through (i) of Section 6 of this Article III.
Section 6. Establishment and Designation of Shares. The
establishment and designation of any Series (or class) of Shares shall be
effective upon the resolution by a majority of the then Trustees, adopting a
resolution which sets forth such establishment and designation and the relative
rights and preferences of such Series (or class). Each such resolution shall be
incorporated herein by reference upon adoption.
Shares of each Series (or class) established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All
consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income, earnings, profits and
proceeds thereof, from whatever source derived, including, without limitation,
any proceeds derived from the sale, exchange or liquidation of such assets, and
any funds or payments derived from any reinvestment of such proceeds, in
whatever form the same may be, are herein referred to as "assets held with
respect to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as assets held with respect to any particular Series (collectively
"General Assets"), the Trustees shall allocate such General Assets to, between
or among any one or more of the Series in such manner and on such basis as the
Trustees, in their sole discretion, deem fair and equitable, and any General
Asset so allocated to a particular Series shall be held with respect to that
Series. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all Series for all purposes.
(b) Liabilities Held with Respect to a Particular Series. The
assets of the Trust held with respect to each particular Series shall be charged
against the liabilities of the Trust held with respect to that Series and all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities of the Trust which are not readily identifiable as being
held with respect to any particular Series shall be allocated and charged by the
Trustees to and among any one or more of the Series in such manner and on such
basis as the Trustees in their sole discretion deem fair and equitable. The
liabilities, expenses, costs, charges, and reserves so charged to a Series are
herein referred to as "liabilities held with respect to" that Series. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all Series for all purposes.
All Persons who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated to any
particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
claimant relationship.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor, except as specifically provided in
Section 7 of this Article III, shall any Shareholder of any particular Series
otherwise have any right or claim against the assets held with respect to any
other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Voting. All Shares of the Trust entitled to vote on a
matter shall vote separately by Series (and, if applicable, by class): that is,
the Shareholders of each Series (or class) shall have the right to approve or
disapprove matters affecting the Trust and each respective Series (or class) as
if the Series (or classes) were separate companies. There are, however, two
exceptions to voting by separate Series (or classes). First, if the 1940 Act
requires all Shares of the Trust to be voted in the aggregate without
differentiation between the separate Series (or classes), then all the Trust's
Shares shall be entitled to vote on a one-vote-per-Share basis. Second, if any
matter affects only the interests of some but not all Series (or classes), then
only the Shareholders of such affected Series (or classes) shall be entitled to
vote on the matter.
(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate undivided interest in the assets held with
respect to that Series (subject to the liabilities held with respect to that
Series and such rights and preferences as may have been established and
designated with respect to classes of Shares within such Series), and each Share
of any particular Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority
to provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities held
with respect to any two or more Series into assets and liabilities held with
respect to a single Series.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series (or class) previously established
and designated, the Trustees may by resolution of a majority of the then
Trustees abolish that Series (or class) and rescind the establishment and
designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder
or former Shareholder shall be exposed to liability by reason of a claim or
demand relating to his or her being or having been a Shareholder, and not
because of his or her acts or omissions, the Shareholder or former Shareholder
(or his or her heirs, executors, administrators, or other legal representatives
or in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand.
ARTICLE IV.
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed, or by resolution approved at a duly constituted meeting, by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be less than one (1) nor more than fifteen (15). The
Board of Trustees, by action of a majority of the then Trustees at a duly
constituted meeting, may fill vacancies in the Board of Trustees or remove
Trustees with or without cause. Each Trustee shall serve during the continued
lifetime of the Trust until he or she dies, resigns, is declared bankrupt or
incompetent by a court of appropriate jurisdiction, or is removed, or, if
sooner, until the next meeting of Shareholders called for the purpose of
electing Trustees and until the election and qualification of his or her
successor. Any Trustee may resign at any time by written instrument signed by
him and delivered to any officer of the Trust or to a meeting of the Trustees.
Such resignation shall be effective upon receipt unless specified to be
effective at some other time. Except to the extent expressly provided in a
written agreement with the Trust, no Trustee resigning and no Trustee removed
shall have any right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of such removal. The
Shareholders may fix the number of Trustees and elect Trustees at any meeting of
Shareholders called by the Trustees for that purpose. Any Trustee may be removed
at any meeting of Shareholders by a vote of two-thirds of the outstanding Shares
of the Trust. A meeting of Shareholders for the purpose of electing or removing
one or more Trustees may be called (i) by the Trustees upon their own vote, or
(ii) upon the demand of Shareholders owning 10% or more of the Shares of the
Trust in the aggregate.
Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination, resignation, retirement, removal, or incapacity of one
or more Trustees, or all of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration of
Trust. Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled as provided in Article IV, Section 1, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Board of Trustees. In the event of the death,
declination, resignation, retirement, removal, or incapacity of all the then
Trustees within a short period of time and without the opportunity for at least
one Trustee being able to appoint additional Trustees to fill vacancies, the
Trust's Investment Manager(s) are empowered to appoint new Trustees subject to
the provisions of Section 16(a) of the 1940 Act.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board of
Trustees, and such Board shall have all powers necessary or convenient to carry
out that responsibility including the power to engage in securities transactions
of all kinds on behalf of the Trust. Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the administration of the Trust.
Without limiting the foregoing, the Trustees may: adopt By-Laws not inconsistent
with this Declaration of Trust providing for the regulation and management of
the affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; fill vacancies in or
remove from their number, and may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; appoint from their own
number and establish and terminate one or more committees consisting of two or
more Trustees which may exercise the powers and authority of the Board of
Trustees to the extent that the Trustees determine; employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
establish from time to time, in accordance with the provisions of Article III,
Section 6 hereof, any Series (or class) of Shares, each such Series (or class)
to operate as a separate and distinct investment medium and with separately
defined investment objectives and policies and distinct investment purpose; and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. Unless otherwise specified or required by law,
any action by the Board of Trustees shall be deemed effective if approved or
taken by a majority of the Trustees then in office. Any action required or
permitted to be taken at any meeting of the Board of Trustees, or any committee
thereof, may be taken without a meeting if all members of the Board of Trustees
or committee (as the case may be) consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings of the Board of Trustees,
or committee.
Without limiting the foregoing, the Trust shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
preferred stocks, negotiable or non-negotiable instruments, obligations,
evidences of indebtedness, certificates of deposit or indebtedness, commercial
paper, repurchase agreements, bankers' acceptances, and other securities of any
kind, issued, created, guaranteed, or sponsored by any and all Persons,
including, without limitation, states, territories, and possessions of the
United States and the District of Columbia and any political subdivision,
agency, or instrumentality thereof, any foreign government or any political
subdivision of the U.S. Government or any foreign government, or any
international instrumentality, or by any bank or savings institution, or by any
corporation or organization organized under the laws of the United States or of
any state, territory, or possession thereof, or by any corporation or
organization organized under any foreign law, or in "when issued" contracts for
any such securities, to change the investments of the assets of the Trust; and
to exercise any and all rights, powers, and privileges of ownership or interest
in respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust or any Series, subject to any
requirements of the 1940 Act;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
that it is trust property, whether in bearer, unregistered or other negotiable
form, or in its own name or in the name of a custodian or subcustodian or a
nominee or nominees or otherwise or to authorize the custodian or a subcustodian
or a nominee or nominees to deposit the same in a securities depository, subject
in each case to proper safeguards according to the usual practice of investment
companies or any rules or regulations applicable thereto;
(f) To consent to, or participate in, any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust or Series (or class), or partly out of the principal and partly out of
income, and to charge or allocate the same to, between or among such one or more
of the Series (or class) that may be established or designated pursuant to
Article III, Section 6, as they deem fair, all expenses, fees, charges, taxes
and liabilities incurred or arising in connection with the Trust or Series (or
class), or in connection with the management thereof, including, but not limited
to, the Trustees' compensation and such expenses and charges for the services of
the Trust's officers, employees, investment adviser or manager, principal
underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly, in
advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by the
Trustees, by setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the number of
shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as vested in the Trust,
except that the Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the Trustees, or in the
name of the Trust, or in the name of any other Person as nominee, on such terms
as the Trustees may determine. The right, title and interest of the Trustees in
the Trust Property shall vest automatically in each Person who may hereafter
become a Trustee. Upon the resignation, removal or death of a Trustee he or she
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be
set forth in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any corporation,
trust, association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including without limitation,
authority for the Investment Manager or administrator to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series (or classes) or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth in the By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from
time to time, to contract with any entity to provide such other services to the
Trust or one or more of the Series, as the Trustees determine to be in the best
interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, Manager, adviser, Principal Underwriter,
distributor, or affiliate or agent of or for any corporation,
trust, association, or other organization, or for any parent
or affiliate of any organization with which an advisory,
management or administration contract, or principal
underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may
have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trust,
associations, or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
ARTICLE V.
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article
III, Section 6(d), the Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, and (ii)
with respect to such additional matters relating to the Trust as may be required
by this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of electing Trustees
as provided in Article IV, Section 1 and for such other purposes as may be
prescribed by law, by this Declaration of Trust or by the By-Laws. Meetings of
the Shareholders may also be called by the Trustees from time to time for the
purpose of taking action upon any other matter deemed by the Trustees to be
necessary or desirable. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by mailing such notice at least
seven (7) days before such meeting, postage prepaid, stating the time and place
of the meeting, to each Shareholder at the Shareholder's address as it appears
on the records of the Trust. Whenever notice of a meeting is required to be
given to a Shareholder under this Declaration of Trust or the By-Laws, a written
waiver thereof, executed before or after the meeting by such Shareholder or his
or her attorney thereunto authorized and filed with the records of the meeting,
shall be deemed equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by applicable law, by the By-Laws or by this Declaration of
Trust, forty percent (40%) of the Shares entitled to vote shall constitute a
quorum at a Shareholders meeting. When any one or more Series (or classes) is to
vote as a single class separate from any other Shares, forty percent (40%) of
the Shares of each such Series (or classes) entitled to vote shall constitute a
quorum at a Shareholder's meeting of that Series. Any meeting of Shareholders
may be adjourned from time to time by a majority of the votes properly cast upon
the question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d), when a quorum is present at any
meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law.
Section 4. Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if Shareholders holding a majority
of the Shares entitled to vote on the matter (or such larger proportion thereof
as shall be required by any express provision of this Declaration of Trust or by
the By-Laws) and holding a majority (or such larger proportion as aforesaid) of
the Shares of any Series (or class) entitled to vote separately on the matter
consent to the action in writing and such written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series (or class) who are entitled to vote or act at any
meeting or any adjournment thereof, the Trustees may from time to time fix a
time, which shall be not more than ninety (90) days before the date of any
meeting of Shareholders, as the record date for determining the Shareholders of
such Series (or class) having the right to notice of and to vote at such meeting
and any adjournment thereof, and in such case only Shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date. For the purpose of determining
the Shareholders of any Series (or class) who are entitled to receive payment of
any dividend or of any other distribution, the Trustees may from time to time
fix a date, which shall be before the date for the payment of such dividend or
such other payment, as the record date for determining the Shareholders of such
Series (or class) having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series for all or
any part of the period between a record date and a meeting of Shareholders or
the payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting different record dates for different Series
(or classes).
Section 6. Additional Provisions. The By-Laws may include
further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI.
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-Laws or in a
duly adopted vote of the Trustees such bases and time for determining the per
Share or net asset value of the Shares of any Series or net income attributable
to the Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for redemption, upon the
presentation of a proper instrument of transfer together with a request directed
to the Trust or a Person designated by the Trust that the Trust purchase such
Shares or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, in accordance with the By-Laws and applicable law.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange (the "Exchange") is closed for
other than weekends or holidays, or if permitted by the Rules of the Commission
during periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of the net
assets held with respect to such Series or during any other period permitted by
order of the Commission for the protection of investors, such obligations may be
suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid wholly
or partly in kind if the Trustees determine that such payment is advisable in
the interest of the remaining Shareholders of the Series for which the Shares
are being redeemed. Subject to the foregoing, the fair value, selection and
quantity of securities or other property so paid or delivered as all or part of
the redemption price may be determined by or under authority of the Trustees. In
no case shall the Trust be liable for any delay of any corporation or other
Person in transferring securities selected for delivery as all or part of any
payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right at its option and at any time to redeem Shares of any
Shareholder at the net asset value thereof as described in Section 1 of this
Article VI: (i) if at such time such Shareholder owns Shares of any Series
having an aggregate net asset value of less than an amount determined from time
to time by the Trustees prior to the acquisition of said Shares; or (ii) to the
extent that such Shareholder owns Shares of a particular Series equal to or in
excess of a percentage of the outstanding Shares of that Series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares equal to or in excess of a percentage, determined from time to time by
the Trustees, of the outstanding Shares of the Trust or of any Series.
ARTICLE VII.
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be
entitled to reasonable compensation from the Trust, and they may fix the amount
of such compensation. Nothing herein shall in any way prevent the employment of
any Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Manager or Principal Underwriter of
the Trust, nor shall any Trustee be responsible for the act or omission of any
other Trustee, and the Trust out of its assets shall indemnify and hold harmless
each and every Trustee from and against any and all claims and demands
whatsoever arising out of or related to each Trustee's performance of his or her
duties as a Trustee of the Trust; provided that nothing herein contained shall
indemnify, hold harmless or protect any Trustee from or against any liability to
the Trust or any Shareholder to which he or she would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued, executed or done by
or on behalf of the Trust or the Trustees or any of them in connection with the
Trust shall be conclusively deemed to have been issued, executed or done only in
or with respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
to the Trust and to any Shareholder solely for his or her own wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and shall not be liable for
errors of judgment or mistakes of fact or law. The Trustees may take advice of
counsel or other experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act or omission in
accordance with such advice nor for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.
Section 4. Insurance. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any claim,
action, suit or proceeding in which he or she becomes involved by virtue of his
or her capacity or former capacity with the Trust, whether or not the Trust
would have the power to indemnify him or her against such liability under the
provisions of this Article.
ARTICLE VIII.
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees.
No Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees or
to see to the application of any payments made or property transferred to the
Trust or upon its order.
Section 2. Termination of Trust or Series. Unless terminated
as provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by vote of a majority of the Shares of each
Series entitled to vote, voting separately by Series, or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of a majority of the Shares of that Series or by the Trustees by written
notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities held, severally, with respect to each Series (or the applicable
Series, as the case may be), whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall, in accordance with such procedures
as the Trustees consider appropriate, reduce the remaining assets held,
severally, with respect to each Series (or the applicable Series, as the case
may be), to distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds held with respect to each
Series (or the applicable Series, as the case may be), to the Shareholders of
that Series, as a Series, ratably according to the number of Shares of that
Series held by the several Shareholders on the date of termination.
Section 3. Merger and Consolidation. The Trustees may cause
(i) the Trust or one or more of its Series to the extent consistent with
applicable law to be merged into or consolidated with another Trust or company,
(ii) the Shares of the Trust or any Series to be converted into beneficial
interests in another business trust (or series thereof) created pursuant to this
Section 3 of Article VIII, or (iii) the Shares to be exchanged under or pursuant
to any state or federal statute to the extent permitted by law. Such merger or
consolidation, Share conversion or Share exchange must be authorized by vote of
a majority of the outstanding Shares of the Trust, as a whole, or any affected
Series, as may be applicable; provided that in all respects not governed by
statute or applicable law, the Trustees shall have power to prescribe the
procedure necessary or appropriate to accomplish a sale of assets, merger or
consolidation including the power to create one or more separate business trusts
to which all or any part of the assets, liabilities, profits or losses of the
Trust may be transferred and to provide for the conversion of Shares of the
Trust or any Series into beneficial interests in such separate business trust or
trusts (or series thereof).
Section 4. Amendments. This Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by a
majority of the then Trustees and, if required, by approval of such amendment by
Shareholders in accordance with Article V, Section 3 hereof. Any such
restatement and/or amendment hereto shall be effective immediately upon
execution and approval. The Certificate of Trust of the Trust may be restated
and/or amended by a similar procedure, and any such restatement and/or amendment
shall be effective immediately upon filing with the Office of the Secretary of
State of the State of Delaware or upon such future date as may be stated
therein.
Section 5. Filing of Copies, References, Headings. The
original or a copy of this instrument and of each restatement and/or amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such restatements and/or amendments. In this instrument and in any such
restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used
herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 6. Applicable Law. This Agreement and Declaration of
Trust is created under and is to be governed by and construed and administered
according to the laws of the State of Delaware and the Delaware Business Trust
Act, as amended from time to time (the "Act"). The Trust shall be a Delaware
business trust pursuant to such Act, and without limiting the provisions hereof,
the Trust may exercise all powers which are ordinarily exercised by such a
business trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code or with other applicable laws
and regulations, the conflicting provision shall be deemed never to have
constituted a part of the Declaration of Trust; provided, however, that such
determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust only. It is the intention of the
Trustees to create a business trust pursuant to the Delaware Business Trust Act,
as amended from time to time (the "Act"), and thereby to create only the
relationship of trustee and beneficial owners within the meaning of such Act
between the Trustees and each Shareholder. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to such Act. Nothing in this Declaration of Trust
shall be construed to make the Shareholders, either by themselves or with the
Trustees, partners or members of a joint stock association.
Section 9. Use of the name "Franklin". The name "Franklin" and
all rights to the use of the name "Franklin" belongs to Franklin Resources, Inc.
("Franklin"), the sponsor of the Trust. Franklin has consented to the use by the
Trust of the identifying word "Franklin" and has granted to the Trust a
non-exclusive license to use the name "Franklin" as part of the name of the
Trust and the name of any Series of Shares. In the event Franklin or an
affiliate of Franklin is not appointed as Manager and/or Principal Underwriter
or ceases to be the Manager and/or Principal Underwriter of the Trust or of any
Series using such names, the non-exclusive license granted herein may be revoked
by Franklin and the Trust shall cease using the name "Franklin" as part of its
name or the name of any Series of Shares, unless otherwise consented to by
Franklin or any successor to its interests in such names.
IN WITNESS WHEREOF, the Trustees named below do hereby make
and enter into this Declaration of Trust as of the 6th day of November, 1991.
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson Rupert H. Johnson, Jr.
777 Mariners Island Blvd. 777 Mariners Island Blvd.
San Mateo, CA 94404 San Mateo, CA 94404
/s/ Henry L. Jamieson
Henry L. Jamieson
777 Mariners Island Blvd.
San Mateo, CA 94404
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS
777 Mariners Island Boulevard, San Mateo, California 94404
[supplemental signature page]
IN WITNESS WHEREOF, the Trustees named below do hereby make
and enter into this Declaration of Trust as of the 10th day of December, 1991.
/s/ Frank H. Abbott /s/ Charles B. Johnson
Frank H. Abbott Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404
/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
22 Gate House Road 777 Mariners Island Blvd.
Stamford, CT 06902 San Mateo, CA 94404
/s/ S. Joseph Fortunato /s/ Frank W. T. LaHaye
S. Joseph Fortunato Frank W. T. LaHaye
Park Avenue at Morris County 20833 Stevens Creek Blvd.
P.O Box 1945 Suite 102
Morristown, NJ 07692-1945 Cupertino, CA 95014
/s/ David W. Garbellano /s/ Edmund H. Kerr
David W. Garbellano Edmund H. Kerr
111 New Montgomery St., #402 One Liberty Plaza
San Francisco, CA 94105 New York, NY 10006
/s/ Henry L. Jamieson /s/ Hayato Tanaka
Henry L. Jamieson Hayato Tanaka
777 Mariners Island Blvd. 277 Haihai Street
San Mateo, CA 94404 Hilo, HI 96720
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS
777 Mariners Island Boulevard, San Mateo, California 94404
CERTIFICATE OF TRUST
OF
FRANKLIN MUNICIPAL SECURITIES TRUST
a Delaware Business Trust
THIS Certificate of Trust of the FRANKLIN MUNICIPAL SECURITIES
TRUST (the "Trust"), dated as of this 10th day of December 1991, is being duly
executed and filed, in order to form a business trust pursuant to the Delaware
Business Trust Act, Del. Code Ann. tit. 12, Section 3801-3819.
1. NAME. The name of the business trust hereby is "FRANKLIN
MUNICIPAL SECURITIES TRUST."
2. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will
become, prior to the issuance of beneficial interests, a registered investment
company under the Investment Company Act of 1940, as amended. Therefore, in
accordance with section 3807(b) of the Delaware Business Trust Act, the Trust
has and shall maintain in the State of Delaware a registered office and a
registered agent for service of process.
(a) REGISTERED OFFICE. The registered office of the Trust in
Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801.
(b) REGISTERED AGENT. The registered agent for service of
process on the Trust in Delaware is The Corporation Trust Company.
IN WITNESS WHEREOF, the Trustees named below do hereby execute this Certificate
of Trust as of the date first-above written.
/s/ Frank H. Abbott /s/ Charles B. Johnson
Frank H. Abbott Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404
/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
22 Gate House Road 777 Mariners Island Blvd.
Stamford, CT 06902 San Mateo, CA 94404
/s/ S. Joseph Fortunato /s/ Frank W. T. LaHaye
S. Joseph Fortunato Frank W. T. LaHaye
Park Avenue at Morris County 20833 Stevens Creek Blvd.
P.O Box 1945 Suite 102
Morristown, NJ 07692-1945 Cupertino, CA 95014
/s/ David w. Garbellano /s/ Edmund H. Kerr
David W. Garbellano Edmund H. Kerr
111 New Montgomery St., #402 One Liberty Plaza
San Francisco, CA 94105 New York, NY 10006
/s/ Henry L. Jamieson /s/ Hayato Tanaka
Henry L. Jamieson Hayato Tanaka
777 Mariners Island Blvd. 277 Haihal Street
San Mateo, CA 94404 Hilo, HI 96720
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
FRANKLIN MUNICIPAL SECURITIES TRUST
The undersigned certifies that:
1. The name of the business trust is the Franklin Municipal Securities
Trust (the "Business Trust").
2. The amendment to the Certificate of Trust of the Business Trust set
forth below (the "Amendment") has been duly authorized by the Board of
Trustees of the Business Trust.
The following Article is hereby added to the Certificate of Trust:
3. LIMITATION ON LIABILITY. Pursuant to section 3804 of the Delaware
Business Trust Act, Del. Code. Ann. tit. 12, sec. 3801-3819 (the
"Act"), the debts, liabilities, obligations and expenses incurred,
contracted for or otherwise existing with respect to a particular
series of the Trust, whether such series is now existing or is
hereinafter created, shall be enforceable against the assets of such
series only, and not against the assets of the Trust generally.
3. Pursuant to section 3810(b)(1)(c) of the Act, this Certificate of
Amendment to the Certificate of Trust of the Business Trust shall
become effective immediately upon filing with the Office of the
Secretary of State of the State of Delaware.
4. The Amendment is made pursuant to the authority granted to the Trustees
of the Business Trust under Section 3810(b)(2) of the Act and pursuant
to the authority set forth in the governing instrument of the Business
Trust.
IN WITNESS WHEREOF, the undersigned, being a trustee of the Business Trust, has
duly executed this Certificate of Amendment this 14th day of May 1992.
/s/ Charles B. Johnson
Charles B. Johnson
Trustee
BY-LAWS
for the regulation, except as
otherwise provided by statute or
the Agreement and Declaration of Trust of
FRANKLIN MUNICIPAL SECURITIES TRUST
a Delaware Business Trust
TABLE OF CONTENTS
BY-LAWS
FRANKLIN MUNICIPAL SECURITIES TRUST
ARTICLE I Offices
1. Principal Office
2. Delaware Office
3. Other Offices
ARTICLE II Meetings of Shareholders
1. Place of Meetings
2. Call of Meeting
3. Notice of Shareholders' Meeting
4. Manner of Giving Notice; Affidavit of Notice
5. Adjourned Meeting; Notice
6. Voting
7. Waiver of Notice of Consent by Absent Shareholders
8. Shareholder Action by Written Consent without a Meeting
9. Record Date for Shareholder Notice, Voting and
Giving Consents
10. Proxies
11. Inspectors of Election
ARTICLE III Trustees
1. Powers
2. Number of Trustees
3. Vacancies
4. Place of Meetings and Meetings by Telephone
5. Regular Meetings
6. Special Meetings
7. Quorum
8. Waiver of Notice
9. Adjournment
10. Notice of Adjournment
11. Action Without a Meeting
12. Fees and Compensation of Trustees
13. Delegation of Power to Other Trustees
ARTICLE IV Committees
1. Committees of Trustees
2. Meetings and Actions of Committees
ARTICLE V Officers
1. Officers
2. Election of Officers
3. Subordinate Officers
4. Removal and Resignation of Officers
5. Vacancies in Offices
6. Chairman of the Board
7. President
8. Vice President
9. Secretary
10. Treasurer
ARTICLE VI Indemnification of Trustees, Officers
Employees and Other Agents
1. Agents, Proceedings and Expenses
2. Actions Other than by Trust
3. Actions by the Trust
4. Exclusion and indemnification
5. Successful Defense by Agent
6. Required Approval
7. Authorization of Indemnification and
Determination of Reasonableness
8. Advance of Expenses
9. Other Contractual Rights
10. Limitations
11. Insurance
12. Fiduciaries of Corporate Employee Benefit Plan
ARTICLE VII Records and Reports
1. Maintenance and Inspection of Share Register
2. Maintenance and Inspection of By-Laws
3. Maintenance and Inspection of Other Records
4. Inspection by Trustees
5. Financial Statements
ARTICLE VIII General Matters
1. Checks, Drafts, Evidence of Indebtedness
2. Contracts and Instruments; How Executed
3. Certificate of Shares
4. Lost Certificates
5. Representation of Shares of Other Entities
Held by Trust
6. Fiscal Year
ARTICLE IX Amendments
1. Amendment by Shareholders
2. Amendment by Trustees
3. Incorporation by Reference into Agreement
and Declaration of Trust of the Trust
BY-LAWS
OF
FRANKLIN MUNICIPAL SECURITIES TRUST
A Delaware Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from
time to time, may change the location of the principal executive office of the
Trust at any place within or outside the State of Delaware.
Section 2. DELAWARE OFFICE. The Board of Trustees shall establish a
registered office in the State of Delaware and shall appoint as the Trust's
registered agent for service of process in the State of Delaware an individual
resident of the State of Delaware or a Delaware Corporation or a corporation
authorized to transact business in the State of Delaware; in each case the
business office of such registered agent for service of process shall be
identical with the registered Delaware office of the Trust.
Section 3. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the Trust
intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside State of Delaware designated by the Board of
Trustees. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be
called at any time by the Board of Trustees or by the chairman of the board or
by the president.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which Trustees are to be elected also
shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Declaration of Trust, (iii) a reorganization
of the Trust, or (iv) a voluntary dissolution of the Trust, the notice shall
also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority of the shares represented at that meeting, either in person
or by proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Declaration of Trust, as in effect at such time. The shareholders' vote may be
by voice vote or by ballot, provided, however, that any election for Trustees
must be by ballot if demanded by any shareholder before the voting has begun. On
any matter other than elections of Trustees, any shareholder may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, but if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
the total shares that the shareholder is entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be filed with the Secretary of
the Trust and shall be maintained in the Trust's records. Any shareholder giving
a written consent or the shareholder's proxy holders or a transferee of the
shares or a personal representative of the shareholder or their respective proxy
holders may revoke the consent by a writing received by the Secretary of the
Trust before written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which shall not be more than
ninety (90) days nor less than seven (7) days before the date of any such
meeting as provided in the Declaration of Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at
the close of business on the business day next preceding the
day on which notice is given or if notice is waived, at the
close of business on the business day next preceding the day
on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to action in writing without a meeting, (i) when no
prior action by the Board of Trustees has been taken, shall be
the day on which the first written consent is given, or (ii)
when prior action of the Board of Trustees has been taken,
shall be at the close of business on the day on which the
Board of Trustees adopt the resolution relating to that action
or the seventy-fifth day before the date of such other action,
whichever is later.
Section 10. PROXIES. Every person entitled to vote for Trustees or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Trust. A proxy shall be deemed signed if the shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by & writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of the Texas Business
Corporation Act.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Trustees may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may and on the
request of any shareholder or a shareholder's proxy, shall appoint a person to
fill the vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and
effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the
Declaration of Trust and these By-Laws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the Trust shall be managed and all powers shall be exercised by or
under the direction of the Board of Trustees.
Section 2. NUMBER OF TRUSTEES. The exact number of Trustees within the
limits specified in the Agreement and Declaration of Trust and shall be fixed
from time to time by a written instrument signed or a resolution approved at a
duly constituted meeting by a majority of the Board of Trustees.
Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled
by a majority of the remaining Trustees, though less than a quorum, or by a sole
remaining Trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing Trustees. In the event that at any time less than a
majority of the Trustees holding office at that time were so elected by the
holders of the outstanding voting securities of the Trust, the Board of Trustees
shall forthwith cause to be held as promptly as possible, and in any event
within sixty (60) days, a meeting of such holders for the purpose of electing
Trustees to fill any existing vacancies in the Board of Trustees, unless such
period is extended by order of the United States Securities and Exchange
Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the Trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested Trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of
the Board of Trustees may be held at any place within or outside the State of
Delaware that has been designated from time to time by resolution of the Board.
In the absence of such a designation, regular meetings shall be held at the
principal executive office of the Trust. Any meeting, regular or special, may be
held by conference telephone or similar communication equipment, so long as all
Trustees participating in the meeting can hear one another and all such Trustees
shall be deemed to be present in person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees
for any purpose or purposes may be called at any time by the chairman of the
board or the president or any vice president or the secretary or any two (2)
Trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail or
telegram charges prepaid, addressed to each Trustee at that Trustee's address as
it is shown on the records of the Trust. In case the notice is mailed, it shall
be deposited in the United States mail at least seven (7) calendar days before
the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or to the telegraph company, it shall be given at
least forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to the
Trustee or to a person at the office of the Trustee who the person giving the
notice has reason to believe will promptly communicate it to the Trustee. The
notice need not specify the purpose of the meeting or the place if the meeting
is to be held at the principal executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the Trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Declaration of Trust. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
Trustees if any action taken is approved by a least a majority of the required
quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.
Section 9. ADJOURNMENT. A majority of the Trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Trustees may be taken without a meeting if a
majority of the members of the Board of Trustees shall individually or
collectively consent In writing to that action. Such action by written consent
shall have the same force and effect as a majority vote of the Board of
Trustees. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
Trustee from serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate this power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration of Trust except as otherwise expressly provided
herein or by resolution of the Board of Trustees.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may be
resolution adopted by a majority of the authorized number of Trustees designate
one or more committees, each consisting of two (2) or more Trustees, to serve at
the pleasure of the Board. The Board may designate one or more Trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the resolution
of the Board, shall have the authority of the Board, except with respect to:
(a) The approval of any action which under applicable law also
requires shareholders' approval or approval of the outstanding
shares, or requires approval by a majority of the entire Board
or certain members of said Board;
(b) The filling of vacancies on the Board of Trustees or in any
committee;
(c) the fixing of compensation of the Trustees for serving on the
Board of Trustees or on any committee;
(d) the amendment or repeal of the Declaration of Trust or of the
By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board of
Trustees which by its express terms is not so amendable or
repealable;
(f) a distribution to the shareholders of the Trust, except at a
rate or in a periodic amount or within a designated range
determined by the Board of Trustees; or
(g) the appointment of any other committees of the Board of
Trustees or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees. Alternate members shall be given notice
of meetings of committees and shall have the right to attend all meetings of
committees. The Board of Trustees may adopt rules for the government of any
committee not inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a President, a
Secretary, and a Treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and
may empower the president to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board of Trustees at any regular
or special meeting of the Board of Trustees or by the principal executive
officer or by such other officer upon whom such power of removal may be
conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The president may make temporary appointments to a vacant office pending action
by the Board of Trustees.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer is elected, shall if present preside at meetings of the Board of
Trustees and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Trustees or prescribed by the
By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Trustees to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the Trust
and shall, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the officers of the
Trust. He shall preside at all meetings of the shareholders and in the absence
of the chairman of the board or if there be none, at all meetings of the Board
of Trustees. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Trustees or if not ranked, the executive vice president (who shall be
considered first ranked) and such other vice presidents as shall be designated
by the Board of Trustees, shall perform all the duties of the president and when
so acting shall have all powers of and be subject to all the restrictions upon
the president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Trustees or the president or the chairman of the board or by these
By-Laws.
Section 9. SECRETARY. - The secretary shall keep or cause to be kept at
the principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of Trustees,
committees of Trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at Trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
a share register or a duplicate share register showing the names of all
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same and the number and date
of cancellation of every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of
the shareholders and of the Board of Trustees required to be given by these
By-Laws or by applicable law and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial
officer of the Trust and shall keep and maintain or cause to be kept and
maintained adequate and correct books and records of accounts of the properties
and business transactions of the Trust, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any Trustee.
The treasurer shall deposit all monies and other valuables in the name
and to the credit of the Trust with such depositaries as may be designated by
the Board of Trustees. He shall disburse the funds of the Trust as may be
ordered by the Board of Trustees, shall render to the president and Trustees,
whenever they request at, an account of all of his transactions as chief
financial officer and of the financial condition of the Trust and shall have
other powers and perform such other duties as may be prescribed by the Board of
Trustees or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed: (a) in the case of conduct in his official
capacity as a Trustee of the Trust, that his conduct was in the Trust's best
interests and (b), in all other cases, that his conduct was at least not opposed
to the Trust's best interests and (c) in the case of a criminal proceeding, that
he had no reasonable cause to believe the conduct of that person was unlawful.
The termination of any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of this Trust or that the
person had reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue, or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the person's
official capacity; or
(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity
for the expenses which the court shall determine; or
(c) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not
parties to the proceeding and are not interested persons of
the Trust (as defined in the Investment Company Act of 1940);
or
(b) A written opinion by an independent legal counsel.
Section 7. AUTHORIZATION OF INDEMNIFICATION AND DETERMINATION 0F
REASONABLENESS. An authorization of indemnification and determination as to
reasonableness of expenses must be made in the same manner as set forth in
Section 6 of this Article for the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by independent legal counsel, authorization of
indemnification and determination as to reasonableness of expenses must be made
by a majority vote of a quorum consisting of Trustees who, at the time of the
vote, are not named defendants or respondents in the proceeding; or if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Trustees, designated to act in the matter by a majority vote of all Trustees,
consisting solely of two or more Trustees who, at the time of the vote, are not
named defendants or respondents in the proceeding.
Section 8. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding (a) receipt of a written affirmation by the Trustee of his good faith
belief that he has met the standard of conduct necessary for indemnification
under this Article and a written undertaking by or on behalf of the agent, such
undertaking being an unlimited general obligation to repay the amount of the
advance if it is ultimately determined that he has not met those requirements,
and (b) a determination that the facts then known to those making the
determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.
Section 9. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 10. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(a) That it would be inconsistent with a provision of the
Declaration of Trust, a resolution of the shareholders, or an
agreement in effect at the time of accrual of the alleged
cause of action asserted in the proceeding in which the
expenses were incurred or other amounts were paid which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 11. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article.
Section 12. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, Investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust
shall keep at its principal executive office or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Trustees, a record of its shareholders, giving the names and
addresses of all shareholders and the number and series of shares held by each
shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep
at its principal executive office the original or a copy of these By-Laws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive offices of the Trust.
The minutes shall be kept in written form and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of &
voting trust certificate at any reasonable time during usual business hours for
a purpose reasonably related to the holder's interests as a shareholder or as
the holder of a voting trust certificate. The inspection may be made in person
or by an agent or attorney and shall include the right to copy and make
extracts.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney and the
right of inspection includes the right to copy and make extracts of documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and
any income statement of the Trust for each quarterly period of each fiscal year
and accompanying balance sheet of the Trust as of the end of each such period
that has been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months and each such
statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes or other evidences of
indebtedness issued in the name of or payable to the Trust shall be signed or
endorsed in such manner and by such person or persons as shall be designated
from time to time in accordance with the resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Trustees, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority may be
general or confined to specific instances; and unless so authorized or ratified
by the Board of Trustees or within the agency power of an officer, no officer,
agent, or employee shall have any power or authority to bind the Trust by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon his request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the chairman of the board or the
president or vice president and by the treasurer or an assistant treasurer or
the secretary or any assistant secretary, certifying the number of shares and
the series of shares owned by the shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent, or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and cancelled at the same time. The Board
of Trustees may in case any share certificate or certificate for any other
security is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement Certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST.
The chairman of the board, the President or any vice President or any other
person authorized by resolution of the Board of Trustees or by any of the
foregoing designated officers, is authorized to vote or represent on behalf of
the Trust any and all shares of any corporation, partnership, trusts, or other
entities, foreign or domestic, standing in the name of the Trust. The authority
granted may be exercised in person or by a proxy duly executed by such
designated person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote, except as otherwise provided by applicable
law or by the Declaration of Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of Shareholders
as Provided in Section 1 of this Article to adopt, amend or repeal Bylaws, and
except as otherwise provided by applicable law or by the Declaration of Trust,
these Bylaws may be adopted, amended, or repealed by the Board of Trustees.
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION OF
TRUST OF THE TRUST. These By-Laws and any amendments thereto shall be
incorporated by reference to the Agreement and Declaration of Trust of the
Trust.
FRANKLIN MUNICIPAL SECURITIES TRUST
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN MUNICIPAL SECURITIES
TRUST, a Delaware business trust, hereinafter called the "Trust", and FRANKLIN
ADVISERS, INC., a California corporation, hereinafter called the "Manager."
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for each of the funds currently or hereafter organized as separate
series of the Trust (the "Funds"); and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Funds.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Funds in any way or otherwise be deemed an agent of the Funds or the Trust.
2. Obligations of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. Administrative Services. The Manager shall furnish to the
Funds adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required for
managing the affairs and conducting the business of the Funds, including
conducting correspondence and other communications with the shareholders of the
Funds, maintaining all internal bookkeeping, accounting and auditing services
and records in connection with the Funds' investment and business activities.
The Manager shall employ or provide and compensate the executive, secretarial
and clerical personnel necessary to provide such services. The Manager shall
also compensate all officers and employees of the Trust who are officers or
employees of the Manager or its affiliates.
B. Investment Management Services.
(a) The Manager shall manage the Funds' assets subject to
and in accordance with the respective investment objectives and policies of the
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Funds' assets and the
purchase and sale of their investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Funds' investment
securities shall be exercised. The Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Funds'
assets and the purchase and sale of their investment securities, (ii) the
reasons for such decisions and (iii) the extent to which those decisions have
been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Funds, orders for the execution of the Funds'
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Funds, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set forth
in this section have been satisfied. The parties recognize that there are likely
to be many cases in which different brokers are equally able to provide such
best price and execution and that, in selecting among such brokers with respect
to particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to the Funds and the
Manager in accordance with the standards set forth below. Moreover, to the
extent that it continues to be lawful to do so and so long as the Board of
Trustees determines that the Funds will benefit, directly or indirectly, by
doing so, the Manager may place orders with a broker who charges a commission
for that transaction which is in excess of the amount of commission that another
broker would have charged for effecting that transaction, provided that the
excess commission is reasonable in relation to the value of "brokerage and
research services" (as defined in Section 28(e) (3) of the Securities Exchange
Act of 1934) provided by that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Funds' transactions from
among:
(i) Those brokers and dealers who provide quotations
and other services to the Funds, specifically
including the quotations necessary to determine the
Funds' net assets, in such amount of total brokerage
as may reasonably be required in light of such
services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Funds, or
which place the Manager in a better position to make
decisions in connection with the management of the
Funds' assets and securities, whether or not such
data may also be useful to the Manager and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the Trust's
officers are satisfied that the best execution is
obtained, the sale of shares of the Funds may also be
considered as a factor in the selection of
broker-dealers to execute the Funds' portfolio
transactions.
(c) When the Manager has determined that any of the Funds
should tender securities pursuant to a "tender offer solicitation," Franklin
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the applicable Fund shall enter into an
agreement with the Manager and/or Distributors to reimburse them for all such
expenses connected with attempting to collect such fees, including legal fees
and expenses and that portion of the compensation due to their employees which
is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager with brokers falling into each of the categories
referred to above and the manner in which the allocation has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for the Funds.
C. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and Other Materials. The Manager,
its officers and employees will make available and provide accounting and
statistical information required by the Funds in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Funds may reasonably request for use in
the preparation of such documents or of other materials necessary or helpful for
the underwriting and distribution of the Funds' shares.
D. Other Obligations and Services. The Manager shall make
its officers and employees available to the Board of Trustees and officers of
the Trust for consultation and discussions regarding the administration and
management of the Funds and their investment activities.
3. Expenses of the Funds. It is understood that the Funds will pay all
of their own expenses other than those expressly assumed by the Manager herein,
which expenses payable by the Funds shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian,
dividend disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of their shares;
D. Expenses of obtaining quotations for calculating the
value of the Fund's net assets'
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Manager or its affiliates;
F. Taxes levied against the Funds;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Funds;.
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of Board of Trustees and
shareholders of the Funds, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Funds and their shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to their
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. Compensation of the Manager. The Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the respective
Fund's net assets, calculated as set forth below, as compensation for the
services rendered and obligations assumed by the Manager, during the preceding
month, on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Funds shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Trust's
current prospectus and statement of additional information. The rate of the
management fee payable by each of the Funds shall be calculated daily at the
following annual rates:
.625 of 1% of the value of net assets up to and including
$100,000,000;
.50 of 1% of the value of net assets over $100,000,000 up to
and including $250,000,000; and
.45 of 1% of the value of net assets in excess of
$250,000,000.
B. The Management fee payable by any of the Funds shall be
reduced or eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith as set forth in paragraph 2.B.(c) of this
Agreement. The Manager may, from time to time, voluntarily reduce or waive any
management fee due to it hereunder.
C. To the extent that the gross operating costs and expenses
of the Funds (excluding any interest, taxes, brokerage, commissions,
amortization of organization expense, expenses under the Distribution Plan, and
with the prior written approval of any state securities commission requiring
same, any extraordinary expenses, such as litigation), exceed the most stringent
expense limitation requirements of the states in which shares of the Funds are
qualified for sale, the Manager shall reduce its fees by the amount of such
excess.
5. Activities of the Manager. The services of the Manager to the Funds
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Funds as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or to
the Funds or to any shareholder of the Funds for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by any of
the Funds.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and Exchange
Commission) which the Trust incurs as the result of action or inaction of the
Manager or any of its affiliates or any of their officers, directors, employees
or stockholders where the action or inaction necessitating such expenditures (i)
is directly or indirectly related to any transactions or proposed transaction in
the stock or control of the Manager or its affiliates (or litigation related to
any pending or proposed or future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the Trust's
Board of Trustees; or, (ii) is within the control of the Manager or any of its
affiliates or any of their officers, directors, employees or stockholders. The
Manager shall not be obligated pursuant to the provisions of this Subparagraph
6(B), to reimburse the Trust for any expenditures related to the institution of
an administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is 'in effect, the
Manager shall pay to the Trust the amount due for expenses subject to this
Subparagraph 6(B) within 30 days after a bill or statement has been received by
the Manager therefor. This provision shall not be deemed to be a waiver of any
claim the Trust may have or may assert against the Manager or others for costs,
expenses or damages heretofore incurred by the Trust or for costs, expenses or
damages the Trust may hereafter incur which are not reimbursable to it
hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter as to
each Fund for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding voting
securities of each Fund or by a vote of the Board of Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust who are not parties to
the Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated with respect to any of the
Funds without the payment of any penalty either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Fund seeking to terminate the Agreement, on 30 days' written notice to the
Manager;
(ii) shall immediately terminate with respect to the Funds
in the event of its assignment; and
(iii) may be terminated by the Manager with respect to the
Funds on 60 days' written notice to the applicable Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 26th day of February, 1992.
FRANKLIN MUNICIPAL SECURITIES TRUST
/s/ Charles B. Johnson
By: Charles B. Johnson
FRANKLIN ADVISERS, INC.
/s/ Rupert H. Johnson, Jr.
By: Rupert H. Johnson, Jr.
FRANKLIN MUNICIPAL SECURITIES TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. Appointment of Underwriter. Upon the execution of this Agreement and
in consideration of the agreements on your part herein expressed and upon the
terms and conditions set forth herein, we hereby appoint you as the exclusive
sales agent for our Shares and agree that we will deliver such Shares as you may
sell. You agree to use your best efforts to promote the sale of Shares, but are
not obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales
of its Shares without sales charges consistent with the terms of the then
current prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. Independent Contractor. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. Offering Price. Shares shall be offered for sale at a price
equivalent to the net asset value per share of that series and class plus any
applicable percentage of the public offering price as sales commission or as
otherwise set forth in our then current prospectus. On each business day on
which the New York Stock Exchange is open for business, we will furnish you with
the net asset value of the Shares of each available series and class which shall
be determined in accordance with our then effective prospectus. All Shares will
be sold in the manner set forth in our then effective prospectus and statement
of additional information, and in compliance with applicable law.
4. Compensation.
A. Sales Commission. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. Distribution Plans. You shall also be entitled to compensation
for your services as provided in any Distribution Plan adopted as to any series
and class of any Fund's Shares pursuant to Rule 12b-1 under the 1940 Act.
5. Terms and Conditions of Sales. Shares shall be offered for sale only
in those jurisdictions where they have been properly registered or are exempt
from registration, and only to those groups of people which the Board may from
time to time determine to be eligible to purchase such shares.
6. Orders and Payment for Shares. Orders for Shares shall be directed
to the Fund's shareholder services agent, for acceptance on behalf of the Fund.
At or prior to the time of delivery of any of our Shares you will pay or cause
to be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. Purchases for Your Own Account. You shall not purchase our Shares
for your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. Sale of Shares to Affiliates. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. Allocation of Expenses. We will pay the expenses:
(a) Of the preparation of the audited and certified
financial statements of our company to be included in
any Post-Effective Amendments ("Amendments") to our
Registration Statement under the 1933 Act or 1940
Act, including the prospectus and statement of
additional information included therein;
(b) Of the preparation, including legal fees, and
printing of all Amendments or supplements filed with
the Securities and Exchange Commission, including the
copies of the prospectuses included in the Amendments
and the first 10 copies of the definitive
prospectuses or supplements thereto, other than those
necessitated by your (including your "Parent's")
activities or Rules and Regulations related to your
activities where such Amendments or supplements
result in expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our
existing shareholders; and
(d) Of filing and other fees to Federal and State
securities regulatory authorities necessary to
continue offering our Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto and statements of additional
information which are necessary to continue to offer
our Shares;
(b) Of the preparation, excluding legal fees, and
printing of all Amendments and supplements to our
prospectuses and statements of additional information
if the Amendment or supplement arises from your
(including your "Parent's") activities or Rules and
Regulations related to your activities and those
expenses would not otherwise have been incurred by
us;
(c) Of printing additional copies, for use by you as
sales literature, of reports or other communications
which we have prepared for distribution to our
existing shareholders; and
(d) Incurred by you in advertising, promoting and selling
our Shares.
10. Furnishing of Information. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. Conduct of Business. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws
and regulations where our Shares are offered for sale and conduct your affairs
with us and with dealers, brokers or investors in accordance with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
12. Redemption or Repurchase Within Seven Days. If Shares are tendered
to us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. Other Activities. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as an
underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. Term of Agreement. This Agreement shall become effective on the
date of its execution, and shall remain in effect for a period of two (2) years.
The Agreement is renewable annually thereafter, with respect to the Fund or, if
the Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, and (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by
any series without the payment of any penalty, (i) either by vote of the Board
or by vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. Suspension of Sales. We reserve the right at all times to suspend
or limit the public offering of Shares upon two days' written notice to you.
16. Miscellaneous. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUNICIPAL SECURITIES TRUST
By: /s/ Deborah R. Gatzek
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Greg Johnson
DATED: April 23, 1995
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as
of February 26, 1992, by and between Franklin Municipal Securities Trust, a
Delaware business trust (the "Trust"), and Bank of America National Trust and
Savings Association, a banking association organized under the laws of the
United States (the "Custodian").
A. The Trust is an investment company registered under the
Investment Company Act of 1940, as amended (the "Investment Company Acts") that
invests and reinvests, on behalf of its series, in Domestic Securities and
Foreign Securities.
B. The Custodian is, and has represented to the Trust that the
Custodian is, a "bank" as that term is defined in Section 2(a)(5) of the
Investment Company Act of 1940, as amended and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Trust and the Custodian desire to provide for the retention
of the Custodian as a custodian Of the assets of the Trust's current series,
Franklin Hawaii Municipal Bond Fund, and such subsequent series as the parties
hereto may determine from time-to-time, on the terms and subject to the
provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1. DEFINITIONS
For purposes of this Agreement, the following terms shall have
the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board of Trustees" shall mean the Board of Trustees of the
Trust.
"Business Day" with respect to any Domestic Security means any
day, other than a Saturday or Sunday, that is not a day on which banking
institutions are authorized or required by law to be closed in The City of New
York and, with respect to Foreign Securities, a London Business Day. "London
Business Day" shall mean any day on which dealings and deposits in U.S. dollars
are transacted in the London interbank market.
"Custodian" shall mean Bank of America National Trust and
Savings Association.
"Domestic Securities" shall have the meaning provided in
Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of
the Board of Trustees.
"Foreign Custodian" shall have the .meaning provided in
Section 4.1 hereof.
"Foreign Securities" shall have the meaning provided in
Section 2.1 hereof.
"Foreign Securities Depository" shall have the meaning
provided in Section 4.1 hereof.
"Trust" shall mean the Franklin Municipal Securities Trust and
any separate series of the Trust hereinafter organized.
"Investment Company Act" shall mean the Investment Company Act
of 1940, as amended.
"Securities" shall have the meaning provided in Section 2.1
hereof.
"Securities System" shall have the meaning provided in Section
3.1 hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Shares" shall mean shares of beneficial interest of the
Trust.
"Subcustodian" shall have the meaning provided in Subsection
3.7 hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting
transfer agent for the Trust.
"Writing" shall mean a communication in writing, a
communication by telex, the custodian's Global custody Instruction system
Trademark, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the custodian.
Section 2.
APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. The Trust hereby appoints and
designates the Custodian as a custodian of the assets of the Trust including
cash, securities the Trust desires robe held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of the Trust delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. The Trust agrees to deliver to the
Custodian Securities and cash owned by the Trust, payments of income, principal
or capital distributions received by the Trust with respect to Securities owned
by the Trust from time to time, and the consideration received by it for such
Shares or other securities of the Trust as may be issued and sold from time to
time. The Custodian shall have no responsibility whatsoever for any property or
assets of the Trust held or received by the Trust and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Trust under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. Upon receipt of Proper Instructions and a
certified copy of a resolution of the Board of Trustees or of the Executive
Committee certified by the Secretary or an Assistant Secretary of the Trust, the
Custodian may from time to time appoint one or more Subcustodians or Foreign
Custodians to hold assets of the Trust in accordance with the provisions of this
Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a
Foreign Custodian shall not have any duty or responsibility to manage or
recommend investments of the assets of the Trust held by them or to initiate any
purchase, sale or other investment transaction in the absence of Proper
Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE TRUST HELD BY
THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and
physically segregate from any property owned by the custodian, for the account
of the Trust, all non-cash property delivered by the Trust to the Custodian
hereunder other than Securities which, pursuant to Subsection 3.8 hereof, are
held through a registered clearing agency, a registered securities depository,
the Federal Reserve's book-entry securities system (referred to herein,
individually, as a "Securities System"), or held by a Subcustodian, Foreign
Custodian or in a Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by the Trust and held by the Custodian in
the following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of
such Securities for the account of the Trust and receipt by
the Custodian, a Subcustodian or a Foreign Custodian of
payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any
repurchase agreement related to such Securities entered into
by the Trust;
(c) in the case of a sale effected through a
Securities System, in accordance with the provisions of
Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in
connection with (i) a tender or other similar offer for
Securities owned by the Trust, or (ii) a tender offer or
repurchase by the Trust of its own Shares;
(e) to the issuer thereof or its agent when such
Securities are called, redeemed, retired or otherwise became
payable; provided, that in any such case, the cash or other
consideration is to be delivered to the Custodian, a
Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer
into the name or nominee name of the Trust, the name or
nominee name of the Custodian, the name or nominee name of any
Subcustodian or Foreign Custodian; or for exchange for a
different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new Securities are
to be delivered to the Custodian, a Subcustodian or Foreign
Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan
of merger, consolidation, recapitalization, or reorganization
of the issuer of such Securities, or pursuant to a conversion
of such Securities; provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar
securities, the surrender thereof in connection with the
exercise of such warrants, rights or similar Securities or the
surrender of interim receipts or temporary Securities for
definitive Securities; provided that, in any such case, the
new Securities and cash, if any, are to be delivered to the
Custodian, a subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of
Securities made by the Trust, but only against receipt by the
Custodian, a Subcustodian or a Foreign Custodian of adequate
collateral as determined by the Trust {and identified in
Proper Instructions communicated to the Custodian), which may
be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, except
that in connection with any loans for which collateral is to
be credited to the account of the Custodian, a Subcustodian or
a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or
responsible for the delivery of Securities owned by the Trust
prior to the receipt of such collateral;
(k) for delivery as security in connection with any
borrowings by the Trust requiring a pledge of assets by the
Trust, but only against receipt by the Custodian, a
Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of
any agreement among the Trust, the Custodian, a Subcustodian
or a Foreign Custodian and a broker-dealer relating to
compliance with the rules of registered clearing corporations
and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Trust;
(m) for delivery in accordance with the provisions of
any agreement among the Trust, the custodian, a Subcustodian
or a Foreign Custodian and a futures commission merchant,
relating to compliance with the rules of the Commodity Futures
Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in
connection with transactions by the Trust;
(n) upon the receipt of instructions from the
Transfer Agent for delivery to the Transfer Agent or to the
holders of Shares in connection with distributions in kind in
satisfaction of requests by holders of Shares for repurchase
or redemption; and
(o) for any other proper purpose, but only upon
receipt of Proper Instructions, and a certified copy of a
resolution of the Trustees or of the Executive Committee
certified by the Secretary or an Assistant Secretary of the
Trust, specifying the securities to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom delivery of such securities shall be
made.
3.3 Registration of Securities. Securities held by the
Custodian, a Subcustodian or a Foreign Custodian (other than bearer Securities}
shall be registered in the name or nominee name of the Trust, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. The Trust agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The custodian shall open and maintain a
separate bank account or accounts for the Trust, subject only to draft or order
by the Custodian acting pursuant to the terms of this Agreement, and shall hold
in such account or accounts, subject to the provisions hereof, all cash received
by it hereunder from or for the account of the Trust, other than cash maintained
by the Trust in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act. Funds held by the Custodian for the
Trust may be deposited by it to its credit as Custodian in the banking
departments of the Custodian, a Subcustodian or a Foreign Custodian. It is
understood and agreed by the Custodian and the Trust that the rate of interest,
if any, payable on such funds (including foreign currency deposits) that are
deposited with the custodian may not be a market rate of interest and that the
rate of interest payable by the Custodian to the Trust shall be agreed upon by
the Custodian and the Trust from time to time. Such funds shall be deposited by
the Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
3.5 Collection of Income Trade Settlement; Crediting of
Accounts. The Custodian shall collect income payable with respect to Securities
owned by the Trust, settle Securities trades for the account of the Trust and
credit and debit the Trust's account with the custodian in connection therewith
as follows;
(a) Upon receipt of Proper Instructions, the
Custodian shall effect the purchase of a Security by charging
the account of the Trust on the contractual settlement date.
The Custodian shall have no liability of any kind to any
parson, including the Trust, if the Custodian effects payment
on behalf of the Trust as provided for herein or in Proper
Instructions, and the seller or selling broker fails to
deliver the Securities purchased.
(b) Upon receipt of Proper Instructions, the
Custodian shall effect the sale of a Security by delivering a
certificate or other indicia of ownership, and shall credit
the account of the Trust with the proceeds of such sale on the
contractual settlement date. The Custodian shall have no
liability of any kind to any person, including the Trust, if
the Custodian delivers such a certificate(s) or other indicia
of ownership as provided for herein or in Proper Instructions,
and the purchaser or Purchasing broker fails to effect payment
to the Trust within a reasonable time period, as determined by
the Custodian in its sole discretion. In such event, the
Custodian shall be entitled to reimbursement of the amount so
credited to the account of the Trust in connection with such
sale.
(c) The Trust is responsible for ensuring that the
Custodian receives timely and accurate Proper Instructions to
enable the Custodian to effect settlement of any purchase or
sale. If the Custodian does not receive such instructions
within the required time period, the Custodian shall have no
liability of any kind to any person, including the Trust, for
failing to effect settlement on the contractual settlement
date. However, the Custodian shall use its best reasonable
efforts to effect settlement as soon as possible after receipt
of Proper Instructions.
(d) The Custodian shall credit the account of the
Trust with interest income payable on interest bearing
Securities on payable date. Interest income on cash balances
will be credited monthly to the account of the Trust on the
first Business Day (on which the Custodian is open for
business) following the end of each month.
Dividends and other amounts payable with respect to
Domestic Securities and Foreign Securities shall be credited
to the account of the Trust when received by the Custodian.
The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to
collect such income and other amounts payable with respect to
Securities owned by the Trust. The collection of income due
the Trust on Domestic Securities loaned pursuant to the
provisions of Subsection 3.2 (J) shall be the responsibility
of the Trust. The Custodian will have no duty or
responsibility in connection therewith, other than to provide
the Trust with such information or data as may be necessary to
assist the Trust in arranging for the timely delivery to the
Custodian of the income to which the Trust is entitled. The
Custodian shall have no liability to any person, including the
Trust, if the Custodian credits the account of the Trust with
such income or other amounts payable with respect to
Securities owned by the Trust (other than Securities loaned by
the Trust pursuant to Subsection 3.2 (J) hereof) and the
Custodian subsequently is unable to collect such income or
other amounts from the payors thereof within a reasonable time
period, as determined by the Custodian in its sole discretion.
In such event, the Custodian shall be entitled to
reimbursement of the amount so credited to the account of the
Trust.
3.6 Payment of Trust Monies. Upon receipt of Proper Instructions the
Custodian shall pay out monies of the Trust in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures
contracts or options on futures contracts for the account of
the Trust but only, except as otherwise provided herein, (i)
against the delivery of such securities, or evidence of title
to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection
3.3 hereof or in proper form for transfer; (ii) in the case of
a purchase effected through a Securities System, in accordance
with the conditions set forth in Subsection 3.8 hereof; or
(iii) in the case of repurchase agreements entered into
between the Trust and the Custodian, another bank or a
broker-dealer (A) against delivery of the Securities either in
certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the
appropriate Federal Reserve Bank with such Securities or (B)
against delivery of the confirmation evidencing purchase by
the Trust of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the
agreement by the Custodian or such broker-dealer or other bank
to repurchase such Securities from the Trusts
(b) in connection with conversion, exchange or
surrender of Securities owned by the Trust as set forth in
Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued
by the Trust;
(d) for the payment of any expense or liability
incurred by the Trust, including but not limited to the
following payments for the account of the Trust: custodian
fees, interest, taxes, management, accounting, transfer agent
and legal fees and operating expenses of the Trust whether or
not such expenses are to be in whole or part capitalized or
treated as deferred expenses; and
(e) for the payment of any dividends or distributions
declared by the Board of Trustees with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may, upon
receipt of Proper Instructions, appoint another bank or trust company, which is
itself qualified under the Investment Company Act to act as a custodian (a
"Subcustodian"), as the agent of the Custodian to carry out such of the duties
of the Custodian hereunder as a Custodian may from time to time direct;
provided, however, that the appointment of any Subcustodian shall not relieve
the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian
may deposit and/or maintain Domestic Securities owned by the Trust in a
Securities System in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and subject to
the following provisions:
(a) the Custodian may hold Domestic Securities of the
Trust in the Depository Trust Company or the Federal Reserve's
book entry system or, upon receipt of Proper Instructions, in
another Securities System provided that such securities are
held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any
assets of the custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(b) the records of the Custodian with respect to
Domestic Securities of the Trust which are maintained in a
Securities System shall identify by book-entry those Domestic
Securities belonging to the Trust;
(c) the Custodian shall pay for Domestic Securities
purchased for the account of the Trust upon (i) receipt of
advice from the Securities System that such securities have
been transferred to the Securities System Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the
Trust. The Custodian shall transfer Domestic Securities sold
for the account of the Trust upon (A) receipt of advice from
the Securities System that payment for such securities has
been transferred to the Securities System Account, and (B) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Trust. Copies
of all advices from the Securities System of transfers of
Domestic Securities for the account of the Trust shall be
maintained for the Trust by the Custodian and be provided to
the Trust at its request. Upon request, the Custodian shall
furnish the Trust confirmation of each transfer to or from the
account of the Trust in the form of a written advice or
notice; and
(d) upon request, the Custodian shall provide the
Trust with any report obtained by the Custodian on the
Securities System's accounting system, internal accounting
control and procedures for safeguarding domestic securities
deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or accounts for
and on behalf of the Trust, into which account or accounts may be transferred
cash and/or Securities, including Securities maintained in an account by the
custodian pursuant to Section 3.8 hereof, (i) in accordance with the provisions
of any agreement among the Trust, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market}, or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Trust, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Trust
or commodity futures contracts or options thereon purchased or sold by the Trust
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Trustees or of the Executive Committee
certified by the Secretary or an Assistant Secretary, setting forth the purpose
or purposes of such segregated account and declaring such purposes to be proper
corporate purposes.
3.10 Ownership Certificates for Tax Purposes. The custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of the Trust held by it and in connection
with transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the
Securities held hereunder, promptly deliver to the Trust all proxies, all proxy
soliciting materials and all notices relating to such Securities. If the
Securities are registered otherwise than in the name of the Trust or a nominee
of the Trust, the Custodian shall use its best reasonable efforts, consistent
with applicable law, to cause all proxies to be promptly executed by the
registered holder of such Securities in accordance with Proper Instructions.
3.12 Communications Relating to Trust Portfolio Securities.
The Custodian shall transmit promptly to the Trust all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Trust and the maturity of futures contracts
purchased or sold by the Trust} received by the Custodian from issuers of
Securities being held for the Trust. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Trust all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If the Trust desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Trust shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. Custodian shall each business day
furnish the Trust with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month
Custodian shall furnish the Trust with a list of the portfolio securities
showing the quantity of each issue owned, the cost of each issue and the market
value of each issue at the end of each month. Such monthly report shall also
contain separate listings of (a) unsettled trades and (b) when-issued
securities. Custodian shall furnish such other reports as may be mutually agreed
upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE TRUST
HELD OUTSIDE THE UNITED STATES
4.1 Custody outside the United States. The Trust authorizes
the Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the Board of Trustees or the
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board of
Trustees or of the Executive Committee certified by the Secretary or an
Assistant Secretary of the Trust. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the
securities and other assets maintained in the custody of its foreign branches,
Foreign Custodians and Foreign Securities Depositories to: (i) "foreign
securities", as defined in paragraph (c) (1) of Rule 17f-5 under the Investment
Company Act, and (ii} cash and cash equivalents in such amounts as the Custodian
or the Trust may determine to be reasonably necessary to effect the Trust's
Foreign Securities transactions.
4.3 Foreign Securities Depositories. Except as may otherwise
be agreed upon in writing by the Custodian and the Trust, assets of the Trust
shall be maintained in Foreign Securities Depositories only through arrangements
implemented by the Custodian or Foreign Custodians pursuant to the terms hereof.
4.4 Segregation of Securities. The Custodian shall identify on
its books and records as belonging to the Trust, the Foreign Securities of the
Trust held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement with a
Foreign Custodian shall provide generally that: (a) the Trust's assets will not
be subject to any right, charge, security interest, lien or claim of any kind in
favor of the Foreign Custodian or its creditors, except a claim of payment for
their safe custody or administration; (b) beneficial ownership for the Trust's
assets will be freely transferable without the payment of money or value other
than for custody or administrations (c) adequate records will be maintained
identifying the assets as belonging to the Trust; (d) the independent public
accountants for the Trust, will be given access to the records of the Foreign
Custodian relating to the assets of the Trust Or confirmation of the contents of
those records; (e) the disposition of assets of the Trust held by the Foreign
Custodian will be subject only to the instructions of the Custodian or its
agents; (f) the Foreign Custodian shall indemnify and hold harmless the
Custodian and the Trust from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the Foreign Custodian's
performance of its obligations under such agreement; (g) to the extent
practicable, the Trust's assets will be adequately insured in the event of loss;
and (h) the Custodian will receive periodic reports with respect to the
safekeeping of the Trust's assets, including notification of any transfer to or
from the Trust's account.
4.6 Access of Independent Accountants of the Trust. Upon
request of the Trust, the Custodian will use its best reasonable efforts to
arrange for the independent accountants of the Trust to be afforded access to
the books and records of any Foreign custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Trust.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by the
Trust, but, except to the extent explicitly provided herein, only in any of the
cases specified in Subsection 3.2. Upon receipt of Proper Instructions, the
Custodian shall pay out or instruct the appropriate Foreign Custodian to pay out
monies of the Trust in any of the cases specified in Subsection 3.6.
Notwithstanding anything herein to the contrary, settlement and payment for
Foreign Securities received for the account of the Trust and delivery of Foreign
Securities maintained for the account of the Trust may be effected in accordance
with the customary or established securities trading or securities processing
practices and procedures in the Jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer. Foreign Securities maintained in the
custody of a Foreign Custodian may be maintained in the name of such entity or
its nominee name to the same extent as set forth in Section 3.3 of this
Agreement and the Trust agrees to hold any Foreign Custodian and its nominee
harmless from any liability as a holder of record of such securities.
4.8 Liability of foreign Custodian. Each agreement between the
Custodian and a Foreign custodian shall require the Foreign Custodian to
exercise reasonable care in the performance of its duties and to indemnify and
hold harmless the Custodian and the Trust from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Custodian's performance of such obligations. At the election of the
Trust, it shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Custodian as a consequence of any such
loss, damage, cost, expense, liability or claim if and to the extent that the
Trust has not been made whole for any such loss, damage, cost, expense,
liability or claim.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform the Trust in
the event that the Custodian learns of a material adverse
change in the financial condition of a Foreign Custodian or is
notified by (i) a foreign banking institution employed as a
Foreign Custodian that there appears to be a substantial
likelihood that its shareholders' equity will decline below
$200 million or that its shareholders' equity has declined
below $200 million (in each case computed in accordance with
generally accepted United States accounting principles) and
denominated in U.S. dollars, or (ii) a subsidiary of a United
States bank or bank holding company acting as a Foreign
Custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $100 million
or that its shareholders' equity has declined below $100
million (in each case computed in accordance with generally
accepted United States accounting principles) and denominated
in U.S. dollars.
(b) The custodian will furnish such information as
may be reasonably necessary to assist the Trust's Board of
Trustees in its annual review and approval of the continuance
of all contracts or arrangements with Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions"
means instructions of the Trust received by the Custodian via telephone or in
Writing which the Custodian believes in good faith to have been given by
Authorized Persons (as defined below) or which are transmitted with proper
testing or authentication pursuant to terms and conditions which the Custodian
may specify. Any Proper Instructions delivered to the Custodian by telephone
shall promptly thereafter be confirmed in Writing by an Authorized Person, but
the Trust will hold the Custodian harmless for its failure to send such
confirmation in writing, the failure of such confirmation to conform to the
telephone instructions received or the Custodian's failure to produce such
confirmation at any subsequent time. Unless otherwise expressly provided, all
Proper Instructions shall continue in full force and effect until cancelled or
superseded. If the Custodian requires test arrangements, authentication methods
or other security devices to be used with respect to Proper Instructions, any
Proper Instructions given by the Trust thereafter shall be given and processed
in accordance with such terms and conditions for the use of such arrangements,
methods or devices as the Custodian may put into effect and modify from time to
time. The Trust shall safeguard any testkeys, identification codes or other
security devices which the Custodian shall make available to it. The Custodian
may electronically record any Proper Instructions given by telephone, and any
other telephone discussions, with respect to its activities hereunder. As used
in this Agreement, the term "Authorized Persons" means such officers or such
agents of the Trust as have been designated by a resolution of the Board of
trustees or of the Executive Committee, a certified copy of which has been
provided to the Custodian, to act on behalf of the Trust under this Agreement.
Each of such persons shall continue to be an Authorized Person until such time
as the Custodian receives Proper Instructions that any such officer or agent is
no longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
the Trust:
(a) make payments to itself or others for
minor expenses of handling Securities or other
similar items relating to its duties under this
Agreement, provided that all such payments shall be
accounted for to the Trust;
(b) endorse for collection, in the name of
the Trust, checks, drafts and other negotiable
instruments; and
(c) in general, attend to all
non-discretionary details in connection with the
sale, exchange, substitution, purchase, transfer and
other dealings with the Securities and property of
the Trust except as otherwise provided in Proper
Instructions.
section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any
instructions (conveyed by telephone or in Writing), notice, request, consent,
certificate or other instrument or paper believed by it to be genuine and to
have been properly given or executed by or on behalf of the Trust. The Custodian
may receive and accept a certified copy of a resolution of the Board of Trustees
or Executive Committee as conclusive evidence (a) of the authority of any parson
to act An accordance with such resolution or (b) of any determination or of any
action by the Board of Trustees or Executive Committee as described in such
resolution, and such resolution may be considered as in full force and effect
until receipt by the Custodian of written notice by an Authorized Person to the
contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary
information in its possession (to the extent permissible under applicable law)
to the entity or entities appointed by the Board of Trustees to keep the books
of account of the Trust and/or compute the net asset value per Share of the
outstanding Shares of the Trust.
Section 9. Records
The Custodian shall create and maintain all records relating
to its activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Trust and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Trust and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Trust's request, supply the Trust with a tabulation of Securities
owned by the Trust and held by the Custodian and shall, when requested to do so
by the Trust and for such compensation as shall be agreed upon between the Trust
and the Custodian, include certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian, as agreed upon from time to time between
the Trust and the Custodian.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shal1 be responsible for the performance of only
such duties as are set forth herein or contained in Proper Instructions and
shall use reasonable care in carrying out such duties. The Custodian shall be
liable to the Trust for any loss which shall occur as the result of the failure
of a Foreign Custodian or a Foreign Securities Depository engaged by such
Foreign Custodian or the Custodian to exercise reasonable care with respect to
the safekeeping of securities and other assets of the Trust to the same extent
that the Custodian would be liable to the Trust if the Custodian itself were
holding such securities and other assets. In the event of any loss to the Trust
by reason of the failure of the Custodian, a Foreign Custodian or a Foreign
Securities Depository engaged by such Foreign Custodian or the Custodian to
utilize reasonable care, the Custodian shall be liable to the Trust to the
extent of the Trust's damages, to be determined based on the market value of the
property which is the subject of the loss at the date of discovery of such loss
and without reference to any special conditions or circumstances. The Custodian
shall be held to the exercise of reasonable care in carrying out this Agreement.
The Trust agrees to indemnify and hold harmless the Custodian and its nominees
from all taxes, charges, expenses, assessments, claims and liabilities
(including legal fees and expenses) incurred by any of them in connection with
the performance of this Agreement, except such as may arise from any negligent
action, negligent failure to act or willful misconduct on the part of the
indemnified entity or any Foreign Custodian or Foreign Securities Depository.
The Custodian shall be entitled to rely, and may act, on advice of counsel (who
may be counsel for the Trust) on all matters and shall be without liability for
any action reasonably taken or omitted pursuant to such advice. The Custodian
need not maintain any insurance for the benefit of the Trust.
All collections of funds or other property paid or distributed
in respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Trust. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board of
Trustees and may rely on the genuineness of any such documents which it may in
good faith believe to be validly executed. The Custodian shall not be liable.
for any loss resulting from, or caused by, the direction of the Trust to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences or
events beyond the control of the Custodian. Finally, the Custodian shall not be
liable for any taxes, including interest and penalties with respect thereto,
that maybe levied or assessed upon or in respect of any assets of the Trust held
by the Custodian.
Section 12. LIMITED LIABILITY OF THE TRUST
The Custodian acknowledges that it has received notice of and
accepts the limitations of the Trust's liability as set forth in its Agreement
and Declaration of Trust. The Custodian agrees that the Trust's obligation
hereunder shall be limited to the assets of the Trust, and that the Custodian
shall not seek satisfaction of any such obligation from the shareholders of the
Trust nor from any Trustee, officer, employee, or agent of the Trust.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by the Trust or the
Custodian by 60 days notice in Writing to the other provided that any
termination by the Trust shall be authorized by a resolution of the Board of
Trustees, a certified copy of which shall accompany such notice of termination,
and provided further, that such resolution shall specify the names of the
persons to whom the Custodian shall deliver the assets of the Trust held by it.
If notice of termination is given by the Custodian, the Trust shall, within 60
days following the giving of such notice, deliver to the Custodian a certified
copy of a resolution of the Board of Trustees specifying the names of the
persons to whom the Custodian shall deliver assets of the Trust held by it. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Trust assets to the persons so specified). If within 60 days following the
giving of a notice of termination by the Custodian, the Custodian does not
receive from the Trust a certified copy of a resolution of the Board of Trustees
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Trust held by it, the Custodian, at its election, may deliver such
assets to a bank or trust company doing business in the State of California to
be held and disposed of pursuant to the provisions of this Agreement or may
continue to hold such assets until a certified copy of one or more resolutions
as aforesaid is delivered to the Custodian. The obligations of the parties
hereto regarding the use of reasonable care, indemnities and payment of fees and
expanses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall
(i) create any fiduciary, Joint venture or partnership relationship between the
Custodian and the Trust or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to the Trust of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to
the other party hereto such instruments and other documents as such other party
may reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or
proceeding relating to this Agreement is brought by a party hereto against the
other party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (including allocated costs and
disbursements of in-house counsel), in addition to any other relief to which the
prevailing party may be entitled.
14.4 Notice. Except as otherwise specified herein, each notice
or other communication hereunder shall be in Writing and shall be delivered to
the intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to the Trust:
Franklin Municipal Securities Trust
c/o Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Attentions Trust Manager
if to the Custodian:
Bank of America NT & SA
555 California Street
4th Floor
San Francisco, CA 94104
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original and both of which, when
taken together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in
accordance with, and governed in all respects .by, the laws of the State of
California (without giving effect to principles of conflict of laws).
14.8 Force Majeure. Subject to the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or defaults
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strikes lockout or other labor disputes floods wars
riots thefts earthquakes natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise
any power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this
Agreement is intended to provide any rights or remedies to any person other than
the Trust and the Custodian and their respective successors and assigns, if any.
14.14 Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior agreements and
understandings between the parties hereto relating to the subject matter hereof.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa;; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and delivered as of the date first above written.
"Custodian": BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ John B. Housen
John B. Housen
Its Vice President
"Trust" FRANKLIN MUNICIPAL SECURITIES TRUST
By /s/ Harmon E. Burns
Harmon E. Burns
Its Vice President
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Franklin Municipal Securities Trust:
We consent to the incorporation by reference in Post-Effective Amendment No. 7
to the Registration Statement of Franklin Municipal Securities Trust on Form
N-1A (File No. 33-44132 & 811-6481) of our report dated June 30, 1995 on our
audit of the financial statements and financial highlights of the Trust, which
report is included in the Annual Report to Shareholders for the year ended May
31, 1995, which is incorporated by reference in the Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
July 26, 1995
Franklin Municipal Securities Trust
777 Mariners Island Blvd.
San Mateo, California 94404
Gentlemen:
The undersigned hereby subscribes for the purchase of 10,000 shares of
beneficial interest (the "Shares") of the Franklin Hawaii Municipal Bond Fund
(the "Fund"), a series of Franklin Municipal Securities Trust, $10.00 per share
for a total investment of $100,000. In connection with said subscription, the
undersigned hereby represents that:
1. There is no present reason to anticipate any change in circumstances
or any other occasion or event which would cause the undersigned to sell or
redeem the Shares shortly after the purchase thereof.
2. There are no agreements or arrangements between the undersigned and
the Fund, or any of its officers, trustees, employees or the investment manager
of the Fund, or any affiliated persons thereof with respect to the resale,
future distribution or redemption of the Shares.
3. The sale of the Shares will only be made by redemption to the Fund
and not be a transfer to any third party.
4. The undersigned is aware that in issuing and selling these Shares,
the Fund is relying upon the aforementioned representations.
5. The undersigned is fully aware that the organization expenses of the
Fund, including the costs and expenses of registration of the Shares, are being
charged to the operation of the Fund over a period of five years, and that in
the event the undersigned redeems any portion of these Shares prior to the end
of said amortization period, the undersigned will reimburse the Fund for the pro
rata share of the unamortized organization expenses (by a reduction of the
redemption proceeds) in the same proportion as the number of Shares being
redeemed bears to the total number of remaining initial Shares acquired by the
undersigned hereunder.
FRANKLIN RESOURCES, INC.
Dated: February 11, 1992 By: /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
Franklin Municipal Securities Trust
777 Mariners Island Blvd.
San Mateo, California 94404
Gentlemen:
The undersigned hereby subscribes for the purchase of 190,000 shares of
beneficial interest (the "Shares") of the Franklin Hawaii Municipal Bond Fund
(the "Fund"), a series of Franklin Municipal Securities Trust, $10.00 per share
for a total investment of $1,900,000. In connection with said subscription, the
undersigned hereby represents that:
1. There is no present reason to anticipate any change in circumstances
or any other occasion or event which would cause the undersigned to sell or
redeem the Shares shortly after the purchase thereof.
2. There are no agreements or arrangements between the undersigned and
the Fund, or any of its officers, trustees, employees or the investment manager
of the Fund, or any affiliated persons thereof with respect to the resale,
future distribution or redemption of the Shares.
3. The sale of the Shares will only be made by redemption to the Fund
and not be a transfer to any third party.
4. The undersigned is aware that in issuing and selling these Shares,
the Fund is relying upon the aforementioned representations.
5. The undersigned is fully aware that the organization expenses of the
Fund, including the costs and expenses of registration of the Shares, are being
charged to the operation of the Fund over a period of five years, and that in
the event the undersigned redeems any portion of these Shares prior to the end
of said amortization period, the undersigned will reimburse the Fund for the pro
rata share of the unamortized organization expenses (by a reduction of the
redemption proceeds) in the same proportion as the number of Shares being
redeemed bears to the total number of remaining initial Shares acquired by the
undersigned hereunder.
FRANKLIN RESOURCES, INC.
Dated: March 6, 1992 By: /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
SEC STANDARD TOTAL RETURN
AS OF: 3/31/95
MAX OFFER NAV
ONE YEAR 1.82% 6.40%
P= 1000.00 1000.00
T= 0.0182 0.0640
n= 1 1
ERV= 1018.20 1064.00
FIVE YEAR 6.72% 7.66%
P= 1000.00 1000.00
T= 0.0672 0.0766
n= 5 5
ERV= 1384.30 1446.34
TEN YEAR 8.33% 8.79%
P= 1000.00 1000.00
T= 0.0833 0.0879
n= 10 10
ERV= 2225.81 2322.15
FROM INCEPTION 02/01/77 5.75% 6.00%
P= 1000.00 1000.00
T= 0.0575 0.0600
n= 18.1726 18.1726
ERV= 2762.09 2883.19
AGGREGATE TOTAL RETURN
1 YEAR 1.82% 6.40%
5 YEAR 38.40% 44.63%
10 YEAR 122.48 132.23
FROM INCEPTION 176.01% 188.16%
30-DAY SEC YIELD 5.43%
30-DAY SEC YIELD W/O WAIVER NA
TAXABLE EQUIVALENT SEC YIELD 10.10%
FISCAL YEAR-END DISTRIBUTION 5.98%
RATE (ON MAX OFFERING)
FISCAL YEAR-END DISTRIBUTION 6.24%
RATE (ON NAV)
SEC - YIELD CALCULATION
a = interest/dividends earned 66,055,858
b = expenses accrued 5,442,410
c = avg # of shares o/s 1,878,917,345
d = maximum offering price 7,411
a - b 6
SEC Yield= 2[(------------------------- + 1) -1]
cd
66,055.858 - 5,442,410 6
= 2[(----------------------------------- + 1) -1]
1,878,917,345 * 7.411
60,613,448 6
= 2[(------------------------- + 1) -1]
13,924,656,444
6
= 2[( 1.00435295823956 ) -1]
= 2( 1.02640362813221 - 1)
= 0.0528072563
= 5.28%
TAXABLE EQUIVALENT YIELD CALCULATION
TAXABLE EQUIVALENT YIELD = tax-exempt current yield
------------------------
1 - f + s x (1 - f)) ]
WHERE:
f = federal income tax rate
s = state and local income tax rate
yield = 5.28%
f = 39.60%
s = 11.00%
TAXABLE EQUIVALENT YIELD = 5.28%
------------------------
1 - [.395+(.1 X (1-.396))]
= 5.28%
-------------------
1 - ( 0.396 + 0.66 )
5.28%
= -------------------
0.538
= 9.81%
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN MUNICIPAL SECURITIES TRUST
(the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute, and
to file any of the documents referred to below relating to Post-Effective
Amendments to the Registrant's registration statement on Form N-1A under the
Investment Company Act of 1940, as amended, and under the Securities Act of 1933
covering the sale of shares by the Registrant under prospectuses becoming
effective after this date, including any amendment or amendments increasing or
decreasing the amount of securities for which registration is being sought, with
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and
agents, may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 15TH day of MARCH 1995.
/S/ RUPERT H. JOHNSON, JR. /S/ CHARLES B. JOHNSON
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive
Officer and Trustee Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ DAVID W. GARBELLANO
S. Joseph Fortunato, David W. Garbellano,
Trustee Trustee
/S/ HARMON E. BURNS /S/ FRANK W. T. LAHAYE
Harmon E. Burns, Frank W. T. LaHaye,
Trustee Trustee
/S/ GORDON S. MACKLIN /S/ HAYATO TANAKA
Gordon S. Macklin, Hayato Tanaka,
Trustee Trustee
/S/ MARTIN L. FLANAGAN /S/ DIOMEDES LOO-TAM
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of Franklin Municipal
Securities Trust (the "Trust").
As Secretary of the Trust, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held at
777 Mariners Island Boulevard, San Mateo, California, on March 21, 1995.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene
and Mark H. Plafker as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission, be
executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: March 21, 1995 /S/ DEBORAH R. GATZEK
---------------------
Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN MUNICIPAL SECURITIES TRUST
MAY 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> FRANKLIN ARKANSAS MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 3,811,477
<INVESTMENTS-AT-VALUE> 3,949,511
<RECEIVABLES> 146,048
<ASSETS-OTHER> 46,098
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,141,657
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,916
<TOTAL-LIABILITIES> 7,916
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,000,584
<SHARES-COMMON-STOCK> 400,569
<SHARES-COMMON-PRIOR> 220,000
<ACCUMULATED-NII-CURRENT> 31,781
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (36,658)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 138,034
<NET-ASSETS> 4,133,741
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 171,186
<OTHER-INCOME> 0
<EXPENSES-NET> (2,978)
<NET-INVESTMENT-INCOME> 168,208
<REALIZED-GAINS-CURRENT> (36,658)
<APPREC-INCREASE-CURRENT> 127,376
<NET-CHANGE-FROM-OPS> 258,926
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (138,970)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 177,525
<NUMBER-OF-SHARES-REDEEMED> (9,117)
<SHARES-REINVESTED> 12,161
<NET-CHANGE-IN-ASSETS> 1,920,540
<ACCUMULATED-NII-PRIOR> 2,543
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,978)
<AVERAGE-NET-ASSETS> 2,981,801
<PER-SHARE-NAV-BEGIN> 10.060
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> .191
<PER-SHARE-DIVIDEND> (.441)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.320
<EXPENSE-RATIO> .100
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN MUNICIPAL SECURITIES TRUST
MAY 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 48,360,975
<INVESTMENTS-AT-VALUE> 49,758,824
<RECEIVABLES> 1,316,632
<ASSETS-OTHER> 128,817
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51,204,273
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,731
<TOTAL-LIABILITIES> 102,731
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,376,271
<SHARES-COMMON-STOCK> 5,145,872
<SHARES-COMMON-PRIOR> 3,283,367
<ACCUMULATED-NII-CURRENT> 96,559
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,769,137)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,397,849
<NET-ASSETS> 51,101,542
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,906,912
<OTHER-INCOME> 0
<EXPENSES-NET> (82,749)
<NET-INVESTMENT-INCOME> 2,824,163
<REALIZED-GAINS-CURRENT> (1,402,544)
<APPREC-INCREASE-CURRENT> 2,759,666
<NET-CHANGE-FROM-OPS> 4,181,285
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,727,267)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,877,255
<NUMBER-OF-SHARES-REDEEMED> (1,120,517)
<SHARES-REINVESTED> 105,767
<NET-CHANGE-IN-ASSETS> 19,163,239
<ACCUMULATED-NII-PRIOR> (337)
<ACCUMULATED-GAINS-PRIOR> (366,593)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (82,749)
<AVERAGE-NET-ASSETS> 41,013,100
<PER-SHARE-NAV-BEGIN> 9.730
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .176
<PER-SHARE-DIVIDEND> (.636)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.930
<EXPENSE-RATIO> .200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN MUNICIPAL SECURITIES TRUST MAY 31, 1995 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> FRANKLIN HAWAII MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 30,192,257
<INVESTMENTS-AT-VALUE> 30,980,321
<RECEIVABLES> 5,720,131
<ASSETS-OTHER> 186,304
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 36,886,756
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,388
<TOTAL-LIABILITIES> 59,388
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,646,035
<SHARES-COMMON-STOCK> 3,452,783
<SHARES-COMMON-PRIOR> 2,597,599
<ACCUMULATED-NII-CURRENT> 115,269
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (722,000)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 788,064
<NET-ASSETS> 36,827,368
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,747,814
<OTHER-INCOME> 0
<EXPENSES-NET> (55,106)
<NET-INVESTMENT-INCOME> 1,692,708
<REALIZED-GAINS-CURRENT> (551,385)
<APPREC-INCREASE-CURRENT> 1,468,052
<NET-CHANGE-FROM-OPS> 2,609,375
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,655,958)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,298,192
<NUMBER-OF-SHARES-REDEEMED> (533,534)
<SHARES-REINVESTED> 90,526
<NET-CHANGE-IN-ASSETS> 9,923,308
<ACCUMULATED-NII-PRIOR> 78,519
<ACCUMULATED-GAINS-PRIOR> (170,615)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (55,106)
<AVERAGE-NET-ASSETS> 28,110,319
<PER-SHARE-NAV-BEGIN> 10.360
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> .310
<PER-SHARE-DIVIDEND> (.600)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.670
<EXPENSE-RATIO> .200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN MUNICIPAL SECURITIES TRUST MAY 31, 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 5,812,333
<INVESTMENTS-AT-VALUE> 6,066,897
<RECEIVABLES> 121,511
<ASSETS-OTHER> 150,817
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,339,225
<PAYABLE-FOR-SECURITIES> 342,902
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,345
<TOTAL-LIABILITIES> 353,247
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,694,037
<SHARES-COMMON-STOCK> 568,467
<SHARES-COMMON-PRIOR> 220,000
<ACCUMULATED-NII-CURRENT> 42,120
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,743)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 254,564
<NET-ASSETS> 5,985,978
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 220,937
<OTHER-INCOME> 0
<EXPENSES-NET> (3,592)
<NET-INVESTMENT-INCOME> 217,345
<REALIZED-GAINS-CURRENT> (4,742)
<APPREC-INCREASE-CURRENT> 232,907
<NET-CHANGE-FROM-OPS> 445,510
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (177,638)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 378,401
<NUMBER-OF-SHARES-REDEEMED> (43,219)
<SHARES-REINVESTED> 13,285
<NET-CHANGE-IN-ASSETS> 3,761,909
<ACCUMULATED-NII-PRIOR> 2,413
<ACCUMULATED-GAINS-PRIOR> (1)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,592)
<AVERAGE-NET-ASSETS> 3,611,493
<PER-SHARE-NAV-BEGIN> 10.110
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> .353
<PER-SHARE-DIVIDEND> (.453)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.530
<EXPENSE-RATIO> .100
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN MUNICIPAL SECURITIES TRUST MAY 31, 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> FRANKLIN WASHINGTON MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 5,833,334
<INVESTMENTS-AT-VALUE> 5,865,979
<RECEIVABLES> 110,853
<ASSETS-OTHER> 35,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,012,519
<PAYABLE-FOR-SECURITIES> 172,753
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,969
<TOTAL-LIABILITIES> 271,722
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,756,478
<SHARES-COMMON-STOCK> 579,874
<SHARES-COMMON-PRIOR> 447,362
<ACCUMULATED-NII-CURRENT> 36,472
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (84,798)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,645
<NET-ASSETS> 5,740,797
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 297,529
<OTHER-INCOME> 0
<EXPENSES-NET> (4,794)
<NET-INVESTMENT-INCOME> 292,735
<REALIZED-GAINS-CURRENT> (53,725)
<APPREC-INCREASE-CURRENT> 282,570
<NET-CHANGE-FROM-OPS> 521,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (287,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,017
<NUMBER-OF-SHARES-REDEEMED> (83,642)
<SHARES-REINVESTED> 23,137
<NET-CHANGE-IN-ASSETS> 1,468,529
<ACCUMULATED-NII-PRIOR> 31,109
<ACCUMULATED-GAINS-PRIOR> (31,073)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,794)
<AVERAGE-NET-ASSETS> 4,776,133
<PER-SHARE-NAV-BEGIN> 9.550
<PER-SHARE-NII> .560
<PER-SHARE-GAIN-APPREC> .355
<PER-SHARE-DIVIDEND> (.565)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.900
<EXPENSE-RATIO> .100
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
FRANKLIN GROUP OF FUNDS
777 Mariners Island Boulevard
San Mateo, California 94404
July 31, 1995
Filed Via EDGAR (CIK #0000881309)
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Franklin Municipal Securities Trust
File Nos. 33-44132 & 811-6481
Gentlemen:
Pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended (the "1940 Act"),
submitted herewith for filing, on behalf of the above-referenced
Registrant, is Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A (the
"Amendment").
The filing has been made in order to bring the financial
statements and other information up to date as required by the
federal securities laws and to incorporate certain changes to
the Trust's prospectus and statement of additional information.
As requested by the Division of Investment Management in a letter
to investment company registrants, dated February 25, 1994, the
Fund also states the following (applicable items are noted by an
"X" mark):
---- If applicable, the series being filed
hereby are money market funds.
---- --- of such money market funds the ()
Fund(s) is (are) taxable and the () Fund(s)
is (are) non-taxable.
---- This filing relates to a master/feeder
arrangement.
-x- The Fund(s) may be marketed through
banks, savings and loan associations, or
credit unions.
---- The Fund's operations raise novel or
complex issues of law or policy.
Pursuant to Rule 485(a), the Amendment will become effective on
October 1, 1995. Please direct any inquiries regarding this
filing to the undersigned at (415) 312-2813 or the address
shown above.
Sincerely yours,
Franklin Municipal Securities Trust
/s/ Larry L. Greene
LARRY L. GREENE
Senior Corporate Counsel
Enclosure
cc: Richard, Pfordte, Esq.
Mark H. Plafker, Esq.
Peggy Arrivas-Coopers & Lybrand, L.L.P.
Harmon E. Burns, Esq.
