As filed with the Securities and Exchange Commission on September 26, 1996.
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. 10 (x)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12 (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)
[x] on October 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (Date) pursuant to paragraph (a)(ii)
[ ] on (Date) 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 23, 1996.
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
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights"; "How Does the
Information Fund Measure Performance?"
4. General Description of "How Is the Trust Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Fund's Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of Another
Fund?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms and
Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account"
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 Summary
3. Condensed Financial "Financial Highlights"; "How Does the
Information Fund Measure Performance?"
4. General Description of "How Is the Trust Organized?"; "How
Registrant Does the Fund Invest Its Assets?";
"What Are the Fund's Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of Another
Fund?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms and
Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account"
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 Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions"
14. Management of the "Officers and Trustees";
Registrant "Investment Advisory and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How Are Fund Shares
Being Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes";
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
PROSPECTUS & APPLICATION
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin Municipal Securities Trust
OCTOBER 1, 1996
Franklin Arkansas Municipal Bond Fund
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
This prospectus describes 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." It contains information you should know before investing in a Fund.
Please keep it for future reference.
The Fund's SAI, dated October 1, 1996, as may be amended from time to time,
includes more information about each Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF EACH FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
Franklin
Municipal Securities
Trust
October 1, 1996
When reading this prospectus, you will see terms in capital letters. This means
the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary ............................ 2
Financial Highlights ....................... 3
How Does the Fund Invest Its Assets? ....... 5
What Are the Fund's Potential Risks? ....... 11
Who Manages the Fund? ...................... 12
How Does the Fund Measure Performance? ..... 14
How Is the Trust Organized? ................ 15
How Taxation Affects You and the Fund ...... 15
About Your Account
How Do I Buy Shares? ....................... 18
May I Exchange Shares
for Shares of Another Fund?................ 23
How Do I Sell Shares? ...................... 24
What Distributions Might
I Receive From the Fund?................... 26
Transaction Procedures
and Special Requirements................... 27
Services to Help You Manage Your Account ... 31
Glossary
Useful Terms and Definitions ............... 34
Appendix
Special Factors Affecting Each State Fund .. 36
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in a Fund.
It is based on a Fund's historical expenses for the fiscal year ended May 31,
1996. Your actual expenses may vary.
ARKANSAS HAWAII TENNESSEE WASHINGTON
A. Shareholder Transaction Expenses+ FUND FUND FUND FUND
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++
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.63%* 0.63%* 0.63%* 0.63%*
Rule 12b-1 Fees 0.05%** 0.07%** 0.07%** 0.05%**
Other Expenses 0.36% 0.14% 0.21% 0.24%
Total Fund Operating Expenses 1.04% 0.84% 0.91% 0.92%
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR*** 3 YEARS 5 YEARS 10 YEARS
Arkansas Fund $53 $74 $97 $164
Hawaii Fund $51 $68 $87 $142
Tennessee Fund $51 $70 $91 $150
Washington Fund $51 $71 $91 $151
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees and make certain
payments to reduce each Fund's expenses. With this reduction, management fees
and total Fund operating expenses were 0.0% and 0.10% for the Arkansas Fund,
0.14% and 0.35% for the Hawaii Fund, 0.05% and 0.33% for the Tennessee Fund
and 0.0% and 0.10% for the Washington Fund.
**These fees may not exceed 0.10% for the Hawaii Fund and 0.15% for the other
Funds. The combination of front-end sales charges and Rule 12b-1 fees could
cause long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes each Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Funds' independent auditors. Their
audit report covering the time period from the effective date of each Fund
through the end of the most recent fiscal year appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended May 31, 1996. The Annual Report to Shareholders also includes more
information about each Fund's performance. For a free copy, please call Fund
Information.
Franklin Arkansas Municipal Bond Fund
Year Ended May 31
1996 1995 19941
Net Asset Value at Beginning of Period $10.32 $10.06 $10.00
Net Investment Income 0.55 0.51 0.01
Net Realized & Unrealized Gain (Loss) on Securities (0.078) 0.191 0.050
Total From Investment Operations 0.472 0.701 0.060
Distributions From Net Investment Income (0.582) (0.441) -
Distributions From Capital Gains - - -
Total Distributions (0.582) (0.441) -
Net Asset Value at End of Period $10.21 $10.32 $10.06
Total Return+ 4.65% 7.27% 0.60%
Net Assets at End of Period (in 000's) $8,166 $4,134 $2,213
Ratio of Expenses to Average Net Assets++ 0.10% 0.10% 0.03%*
Ratio of Net Investment Income to Average Net Assets 5.69% 5.64% 2.00%*
Portfolio Turnover Rate 19.22% 77.63% -%
Franklin Hawaii Municipal Bond Fund
Year Ended May 31
1996 1995 1994 1993 19922
Net Asset Value at Beginning of Period $10.67 $10.36 $10.80 $10.18 $10.00
Net Investment Income 0.60 0.60 0.62 0.63 0.09
Net Realized & Unrealized
Gain (Loss) on Securities (0.128) 0.310 (0.459) 0.634 0.158
Total From Investment Operations 0.472 0.910 0.161 1.264 0.248
Distributions From Net
Investment Income (0.602) (0.600) (0.601) (0.644)(0.068)
Distributions From Capital Gains - - - - -
Total Distributions (0.602) (0.600) (0.601) (0.644)(0.068)
Net Asset Value at End of Period $10.54 $10.67 $10.36 $10.80 $10.18
Total Return+ 4.49% 9.26% 1.35% 12.77% 8.96%*
Net Assets at End of Period (in 000's)$38,805 $36,827 $26,904 $18,657 $2,978
Ratio of Expenses to Average Net Assets++0.35% 0.20% 0.05% -% -%
Ratio of Net Investment Income to
Average Net Assets 5.63% 6.02% 5.76% 5.95% 4.55%*
Portfolio Turnover Rate 16.01% 22.88% 31.35% 48.70% -%
Franklin Tennessee Municipal Bond Fund
Year Ended May 31
1996 1995 19941
Net Asset Value at Beginning of Period $10.53 $10.11 $10.00
Net Investment Income 0.56 0.52 0.01
Net Realized & Unrealized Gain (Loss) on Securities (0.093) 0.353 0.100
Total From Investment Operations 0.467 0.873 0.110
Distributions From Net Investment Income (0.597) (0.453) -
Distributions From Capital Gains - - -
Total Distributions (0.597) (0.453) -
Net Asset Value at End of Period $10.40 $10.53 $10.11
Total Return+ 4.50% 8.97% 1.10%
Net Assets at End of Period (in 000's) $13,956 $5,986 $2,224
Ratio of Expenses to Average Net Assets++ 0.33% 0.10% 0.03%*
Ratio of Net Investment Income to Average Net Assets 5.67% 6.02% 1.89%*
Portfolio Turnover Rate 27.23% 24.71% 22.64%
Franklin Washington Municipal Bond Fund
Year Ended May 31
1996 1995 1994 19933
Net Asset Value at Beginning of Period $9.90 $9.55 $9.99 $10.00
Net Investment Income 0.56 0.56 0.51 0.03
Net Realized & Unrealized Gain
(Loss) on Securities (0.082) 0.355 (0.464) (0.040)
Total From Investment Operations 0.478 0.915 0.046 (0.010)
Distributions From Net Investment Income (0.578) (0.565) (0.472) -
Distributions From Capital Gains - - (0.014) -
Total Distributions (0.578) (0.565) (0.486) -
Net Asset Value at End of Period $9.80 $9.90 $9.55 $9.99
Total Return+ 4.91% 10.10% 2.88% (1.20)%*
Net Assets at End of Period (in 000's) $7,718 $5,741 $4,272 $2,198
Ratio of Expenses to Average Net Assets++ 0.10% 0.10% 0.05% -%
Ratio of Net Investment Income
to Average Net Assets 5.81% 6.13% 5.59% 3.44%*
Portfolio Turnover Rate 19.13% 18.46% 39.52% -%
*Annualized.
1For the period May 10, 1994 (effective date of registration) to May 31, 1994.
2For the period February 26, 1992 (effective date of registration) to May 31,
1992.
3For 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 is not annualized except where 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, Advisers agreed in advance to limit all or a
portion of its management fees and to make payments of other expenses incurred
by the Funds. If this action had not been taken, the ratios of operating
expenses to average net assets would have been as follows:
Ratio of expenses
to average net assets
Franklin Arkansas Municipal Bond Fund
19941 1.20%*
1995 1.11
1996 1.04
Franklin Hawaii Municipal Bond Fund
19922 1.57*
1993 1.06
1994 0.92
1995 0.87
1996 0.84
Ratio of expenses
to average net assets
Franklin Tennessee Municipal Bond Fund
19941 1.05%*
1995 0.92
1996 0.91
Franklin Washington Municipal Bond Fund
19933 1.44*
1994 0.71
1995 1.05
1996 0.92
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
Each Fund seeks to maximize income exempt from federal income taxes and from the
personal income taxes, if any, for resident shareholders of the named state to
the extent consistent with prudent investing and the preservation of
shareholders' capital. Each Fund's investment objective is a fundamental policy
and may not be changed without shareholder approval. Of course, there is no
assurance that a Fund's objective will be achieved.
Each Fund will invest primarily in municipal securities issued by its respective
state and that state's municipalities, political subdivisions and public
authorities, the interest on which is exempt from regular federal income taxes
and the personal income taxes, if any, of its respective state.
Each Fund will attempt to invest 100% and, as a matter of fundamental policy,
will invest at least 80% of its net assets in securities that pay interest
exempt from federal income taxes, and from the personal income taxes, if any, of
its respective state, but that 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 paid by each Fund from them, may be deemed to
be a preference item under the federal alternative minimum tax and subject to
that tax. Thus, it is possible, although not anticipated, that up to 20% of each
Fund's net assets could be in taxable obligations and each Fund's investments
could consist entirely of municipal securities subject to the federal
alternative minimum tax. As a result, if you are subject to the alternative
minimum tax, any dividends paid by a Fund that would otherwise be tax-exempt may
not be completely tax-exempt to you. Consequently, an investment in a Fund may
not be appropriate for you.
At least 65% of each Fund's total assets will be invested in municipal
securities and obligations issued by or on behalf of its respective state, its
local governments, municipalities, authorities, agencies and political
subdivisions. It is possible, although not anticipated, that up to 35% of a
Fund's total assets may be in qualifying municipal securities and obligations of
a state or territory other than its respective state.
Each Fund may invest, without percentage limitations, 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 that are unrated if, in the opinion of Advisers, the securities
are comparable in quality to those within the four highest ratings. These are
considered to be "investment grade" securities. Bonds rated in the fourth
highest ratings level are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and some speculative characteristics. In the event the rating of an
issue held in a Fund's portfolio is lowered by the rating services, the change
will be considered by the Fund in its evaluation of the overall investment
merits of that security, but the change will not necessarily result in an
automatic sale of the security. A description of the ratings is contained in the
Appendices in the SAI.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with a Fund's investment objective
and policies and thereafter when determining the issuer's comparative credit
rating. When making these determinations, Advisers may (i) interview
representatives of the issuer at its offices (ii) tour and inspect the physical
facilities of the issuer to evaluate the issuer and its operations, (iii)
perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
Under normal market conditions, each Fund will invest its assets as described
above. For temporary defensive purposes, however, each Fund may invest up to
100% of its net assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, each Fund may invest up to 100% of its net assets in (i)
municipal securities and obligations of state and local governments other than
its respective state, (ii) commercial paper rated at least A-1 by S&P, P-1 by
Moody's or F-1+ by Fitch, (iii) obligations issued or guaranteed by the full
faith and credit of the U.S. government or (iv) obligations of domestic banks
with assets of $1 billion or more.
Types of Securities the Fund May Invest In
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession 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 these 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 securities are issued to provide funding for
privately operated facilities.
The Funds have no restrictions on the maturities of municipal securities in
which they may invest. Each Fund will seek to invest in municipal securities
with maturities that, in Advisers' judgment, will provide a high level of
current income consistent with prudent investing. Advisers will also consider
current market conditions.
It is possible that a 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 these 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) 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 and municipal securities
markets, the size of a particular offering, the maturity of the obligation, and
the credit rating of the issuer. Generally, municipal securities with longer
maturities produce higher current yields than municipal securities with shorter
maturities. Prices of longer term securities, however, typically fluctuate more
than those of short term securities due to changes in interest rates, tax laws
and other general market conditions. 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.
PRIVATE ACTIVITY BONDS. 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 issued
after August 7, 1986, while still tax-exempt, constitutes a preference item for
taxpayers in determining the federal alternative minimum tax under the Code, and
under the income tax provisions of some states. This interest may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax, because these
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 corporate shareholders under their state franchise tax systems.
Consistent with each Fund's investment objective, each Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to the Fund. For the fiscal
year ended May 31, 1996, the Funds' portfolios derived the following percentages
of their 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 10.51%
Hawaii Fund 39.02%
Tennessee Fund 24.34%
Washington Fund 26.63%
FLOATING AND VARIABLE RATE OBLIGATIONS. Each Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. Each Fund may also invest in variable or floating rate demand notes
("VRDNs"), that 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.
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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if it is
deemed advisable. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
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.
CALLABLE BONDS. Each Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these bonds may be called. 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 proceeds of a bond called under
these circumstances are reinvested, the result may be a lower overall yield due
to lower current interest rates. If the purchase price of the 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 the bonds were redeemed.
CERTIFICATES OF PARTICIPATION. Each Fund may 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. A COP is created
when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities that are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the obligations issued to buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that distinguishes COPs from municipal debt is that the lease that is
the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to 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, or in
unrated COPs believed by Advisers to be of comparable quality. Criteria
considered by the rating agencies and Advisers in assessing this risk include
the issuing municipality's credit rating, how essential the leased property is
to the municipality, and the term of the lease compared to the useful life of
the leased property. The Board reviews the COPs held in each Fund's portfolio to
assure that they constitute liquid investments based on various factors reviewed
by Advisers and monitored by the Board. These factors include (a) the credit
quality of the 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 ratings 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 each Fund may invest in COPs, as of May 31, 1996, none of
the Funds held more than five percent of the total face amount of the securities
in their portfolios in COPs and other municipal leases.
Other Investment Policies of the Fund
BORROWING. Each Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Funds do not currently
intend to do so, consistent with procedures approved by the Board, each Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, if the loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan. Each Fund, however,
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 the Fund.
ILLIQUID INVESTMENTS. Each Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about each Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
CREDIT AND MARKET RISK. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
INTEREST RATE RISK. Changes in interest rates will affect the value of a Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of a Fund's shares. Interest rates have increased and decreased in the
past. These changes are unpredictable and may happen again in the future.
Since each Fund generally will invest primarily in the securities of its
respective state, there are certain specific factors and considerations
concerning each state that may affect the credit and market risk of the
municipal securities that the Fund buys. These factors are described in the
Appendix to this prospectus and in the SAI.
NON-DIVERSIFICATION RISK. The Funds are non-diversified under the federal
securities laws. As a non-diversified Fund, there are no restrictions under the
1940 Act on the percentage of assets that may be invested at any time in the
securities of any one issuer. To the extent the Funds are not fully diversified
under the 1940 Act, they may be more susceptible to adverse economic, political
or regulatory developments affecting a single issuer than would be the case if
they were more broadly diversified. Each Fund intends, however, to comply with
the diversification 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 they are derived from interest on municipal securities. For this
reason, 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, with
the exception of obligations of the U.S. government, or with respect to 50% of
its total assets, more than 5% of its total assets would be invested in the
securities of a single issuer, with the exception of obligations of the U.S.
government.
Who Manages the Fund?
THE BOARD. The Board oversees the management of the Funds and elects their
officers. The officers are responsible for each Fund's day-to-day operations.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
Fund's portfolio is: Thomas Kenny, Robert Schubert, and John Pomeroy, all since
1994.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is the Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986. He received a Bachelor of Arts degree in Business and
Economics from the University of California at Santa Barbara and a Master of
Science degree in Finance from Golden Gate University. He is a member of several
municipal securities industry related committees and associations.
Robert Schubert
Portfolio Manager of Advisers
Mr. Schubert attended Fairleigh Dickenson University, Rutherford, New Jersey,
and has been in the securities industry since 1960. Mr. Schubert has been with
the Franklin Templeton Group since 1989, initially managing two tax-exempt bond
funds and the equity trading desk at Templeton in Florida. He moved to Franklin
in California in 1994.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy joined Advisers in 1986. He received a Bachelor of Arts degree in
Business Administration from San Francisco State University in 1986 and is a
member of industry related committees and associations.
SERVICES PROVIDED BY ADVISERS. Advisers manages each Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Funds and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Trust's
Code of Ethics.
MANAGEMENT FEES. During the fiscal year ended May 31, 1996, management fees,
before any advance limitation, totaled 0.63% of the average daily net assets of
each of the Hawaii, Arkansas, Tennessee and Washington Funds. Total operating
expenses, including management fees before any advance limitation, totaled
1.04%, 0.84%, 0.91% and 0.92% of the average daily net assets of the Arkansas,
Hawaii, Tennessee and Washington Funds, respectively. Under an agreement by
Advisers to limit its fees, the Arkansas and Washington Funds paid no management
fees and the Hawaii and Tennessee Funds paid management fees totaling 0.14% and
0.05% of the respective Fund's average daily net assets. The Funds paid total
operating expenses totaling 0.10%, 0.35%, 0.33% and 0.10% of the average daily
net assets of the Arkansas, Hawaii, Tennessee and Washington Funds,
respectively. Advisers may end this arrangement at any time upon notice to the
Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of the Funds' shares when selecting a broker or dealer. Please see "How Does the
Fund Buy Securities For Its Portfolio?" in the SAI for more information.
The Fund's Rule 12b-1 Plan
Each Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Hawaii Fund under the plan may not exceed 0.10% per year of the
Fund's average daily net assets. Payments by the Arkansas, Tennessee and
Washington Funds under the plans may not exceed 0.15% per year of the average
daily net assets of those Funds. All distribution expenses over these amounts
will be borne by those who have incurred them. During the first year after
certain purchases made without a sales charge, Distributors may keep the Rule
12b-1 fees associated with the purchase. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, the Funds advertise their performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. The Funds may also advertise their taxable-equivalent yield and
distribution rate. Performance figures are usually calculated using the maximum
sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by a Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by a Fund. This rate is usually
computed by annualizing the dividends paid per share during a certain period and
dividing that amount by the current Offering Price. Unlike current yield, the
current distribution rate may include income distributions from sources other
than dividends and interest received by a Fund. The taxable-equivalent yield and
distribution rate show the before-tax yield or distribution rate that would have
to be earned from a taxable investment to equal the Fund's yield or distribution
rate, assuming one or more tax rates.
A Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Funds calculate their performance figures, please see
"How Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Funds are non-diversified series of Franklin Municipal Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust, and is registered with the
SEC under the 1940 Act. Shares of each series of the Trust have equal and
exclusive rights to dividends and distributions declared by that series and the
net assets of the series in the event of liquidation or dissolution. Shares of
each Fund are considered Class I shares for redemption, exchange and other
purposes. In the future, additional series and classes of shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
Conversion to a Master/Feeder Structure
The Funds currently invest directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Funds' investment objectives and other fundamental
policies allow them to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
one or more Funds to a master/feeder structure.
Various states have adopted certain guidelines for registering master/feeder
funds. If the Board decides to convert a Fund to a master/feeder structure, the
Fund will seek shareholder approval before the conversion if required by the
applicable guidelines or law at that time. If shareholder approval is not
required, your purchase of Fund shares will be considered your consent to a
conversion and we will not seek further shareholder approval. We will, however,
notify you in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Funds and their shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
All series of the Trust are treated as separate entities for federal and state
income tax purposes. Each Fund has elected and intends to continue to qualify 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,
each Fund has qualified and continues 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 U.S. 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 U.S. 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 you have 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 you will be subject to regular federal and state income taxes
in your hands. 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 you
until the following January, will be treated, for tax purposes, as if received
by you 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 you have 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 you 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 you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you 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. If you have not held shares of a Fund for a full
calendar year, you 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 your investment in a Fund.
Exempt-interest dividends of a Fund, although exempt from regular federal income
tax in your hands, are includable in the tax base for determining the extent to
which your social security or railroad retirement benefits will be subject to
regular federal income tax. You are required to disclose the receipt of
tax-exempt interest dividends on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry Fund shares may not be fully deductible for federal income tax purposes.
If you are not U.S. persons for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by you 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. You
should consult your tax advisor with respect to the applicability of other state
and local income taxes to your Fund shares and to distributions and redemption
proceeds received from a Fund. Whether you are a corporate, individual or trust
shareholder, you should contact your tax advisor to determine the impact of Fund
dividends and capital gain distributions under the alternative minimum tax that
may apply to your particular tax situation.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares. Currently, the Funds do not allow
investments by Market Timers. Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in the Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Funds' sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1 or 2
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Funds' sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if (a)
the investment objectives were similar to the Fund's, and (b) your shares in
that fund were subject to any front-end or contingent deferred sales charges at
the time of purchase. You must provide a copy of the statement showing your
redemption.
The Funds' sales charges will also not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
7. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of these payments for each qualifying purchase. Securities Dealers
who receive payments under item 1 below will earn the Rule 12b-1 fee associated
with the purchase starting in the thirteenth calendar month after the purchase.
The payments described below are paid by Distributors or one of its affiliates,
at its own expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 0.75% of the purchase price for
purchases of $1 million or more.
2. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 5 and 6 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT(S). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts
under court jurisdiction may have additional requirements.
By Phone
(Only available
if you have
completed and
sent to us the
telephone redemption
agreement included
with this prospectus)
Call Shareholder
Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
METHOD STEPS TO FOLLOW
By Phone o Unless the address on your account was changed by
phone within the last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995.
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
What Distributions Might I Receive From the Fund?
The Funds declare dividends from their net investment income daily and pay them
monthly on or about the 20th day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Funds do not pay "interest" or guarantee any
fixed rate of return on an investment in their shares.
Distribution Options
You may receive your distributions from each Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days prior to the reinvestment date for us to
process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Funds are open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Funds in many newspapers.
To calculate Net Asset Value per share, a Fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. Each Fund's assets are valued as described
under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Funds.
Under the plan, you can have money transferred automatically from your checking
account to a Fund each month to buy additional shares. If you are interested in
this program, please refer to the automatic investment plan application included
with this prospectus or contact your investment representative. The market value
of each Fund's shares may fluctuate and a systematic investment plan such as
this will not assure a profit or protect against a loss. You may discontinue the
program at any time by notifying Investor Services by mail or phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to a Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Funds' front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from a Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need a Fund's code number to use TeleFACTS. The Funds' Codes are 221
for the Arkansas Fund, 173 for the Hawaii Fund, 220 for the Tennessee Fund, and
176 for the Washington Fund.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of a Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of a Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
EXCHANGE - New York Stock Exchange
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin
Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 4.25% sales charge.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - 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
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services,
Distributors, or another wholly owned subsidiary of Resources.
Appendix
Special Factors Affecting Each State Fund
The following information is a brief summary of certain factors affecting each
Fund's respective state. The information is based 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, nor is it
intended to be complete. Additional information is included in the Appendices in
the SAI.
Arkansas
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing, although agriculture remains a significant
component of the state's economy and income. The state's manufacturing industry
reflects the agriculture and forest resources of the state, with the largest
manufacturing industries being food products, electrical products and
appliances, and lumber and paper goods. Arkansas' manufacturing sector is now
its largest employer, representing approximately 25% of the work force, although
significant gains have also been made in the wholesale and retail trade
industries. Construction is currently the state's fastest growing industry,
spurred by population growth and commensurate housing starts. As a result of the
shift towards manufacturing, the state's economy is more diversified and less
sensitive to cyclical changes in any one economic sector.
Despite its economic growth, per capita personal income in Arkansas remains
below the regional and nation averages at 77% of the U.S. level.
Hawaii
Hawaii's economy, tied to the economies of California and Japan, felt the impact
of recent economic recessions and only now is beginning to rebound. Tourism
continues to dominate Hawaii's economy and has been recovering with increasing
traffic from the Pacific Rim, particularly Japan. The number of visitors grew
3.2% in 1995, although the total number of tourists is still substantially below
the state's peak in 1990.
Corporate layoffs, a decline in the construction industry, and the movement of
agricultural operations out of Hawaii to less expensive locations have slowed
the state's employment growth. Unemployment, however, declined to 5.4% in 1995.
Despite the reduction in unemployment, the struggling construction and
agriculture industries continue to exert pressure on the state's historically
strong financial position, which has been reduced as growth and tax revenues
have slowed.
Tennessee
The Tennessee economy has recovered from the nationwide recession and is in an
expansion period. Industrial expansion and new investment continue to be strong
resulting in continued growth, even in manufacturing. Growth in manufacturing
jobs, particularly in durable goods manufacturing, while not as great as in
other sectors such as services, finance, insurance and real estate, has
significantly outpaced national growth.
As a result, total employment has grown and unemployment rates have been at or
below the national average since 1988. Per capita personal income surpasses the
national average. It has steadily increased and in 1994 was 90% of the national
average. Increases in both employment and income are expected to remain above
the national average over the next few years.
Washington
Washington's economic base is diversified among manufacturing, services, and
trade, and retains significant agricultural and timber industries. Manufacturing
currently represents 14% of total nonagricultural employment, services 27%, and
government 19%. The aerospace industry employs about 4% of state workers.
Boeing has announced employment and production increases, and related businesses
are also expected to see gains. The state is now better positioned to absorb
cyclical downturns at Boeing, evidenced by continued growth in the high
technology, services and international trade sectors. Growth in computer and
electronic equipment, software development, retailing, transportation, and
agriculture and food processing have offset declines in traditional businesses
such as aerospace and timber.
PROSPECTUS & APPLICATION
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin California High Yield Municipal Fund
OCTOBER 1, 1996
Franklin Municipal Securities Trust
This prospectus describes the Franklin California High Yield Municipal Fund (the
"Fund"). It contains information you should know before investing in the Fund.
Please keep it for future reference.
The Fund's SAI, dated October 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Fund may invest up to 100% of its net assets in non-investment grade bonds.
These are commonly known as "junk bonds." Their default and other risks are
greater than those of higher rated securities. You should carefully consider
these risks before investing in the Fund. Please see "What Are the Fund's
Potential Risks?"
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 DISTRIBUTORS.
Franklin
California High Yield
Municipal Fund
October 1, 1996
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 5
What Are the Fund's Potential Risks?........ 10
Who Manages the Fund?....................... 15
How Does the Fund Measure Performance?...... 17
How Is the Trust Organized?................. 18
How Taxation Affects You and the Fund....... 18
About Your Account
How Do I Buy Shares?........................ 21
May I Exchange Shares
for Shares of Another Fund? 26
How Do I Sell Shares?....................... 29
What Distributions Might
I Receive From the Fund? 30
Transaction Procedures
and Special Requirements 32
Services to Help You Manage Your Account.... 36
Glossary
Useful Terms and Definitions................ 39
Appendix
Description of Municipal Bond Ratings by S&P 41
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class I for the fiscal year
ended May 31, 1996. Your actual expenses may vary.
<TABLE>
<CAPTION>
A. Shareholder Transaction Expenses+ CLASS I CLASS II
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.25% 1.00%++
<S> <C> <C>
Deferred Sales Charge+++ None 1.00%
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.62%* 0.62%*
Rule 12b-1 Fees 0.09%** 0.65%**
Other Expenses 0.10% 0.10%
Total Fund Operating Expenses 0.81%* 1.37%*
</TABLE>
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $50*** $67 $86 $138
Class II $34 $53 $84 $173
For the same Class II investment, you would pay projected expenses of $24 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more if you sell the shares within one year and any Class II
purchase if you sell the shares within 18 months. There is no front-end sales
charge if you invest $1 million or more in Class I shares. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fee. With this
reduction, management fees were 0.16%. Total operating expenses for Class I
were 0.35% of the average net assets of the Fund and 0.91% (annualized) for
Class II.
**These fees may not currently exceed 0.10% for Class I and 0.65% for Class
II. The combination of front-end sales charges and Rule 12b-1 fees could
cause long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the periods appears in the financial statements in
the Trust's Annual Report to Shareholders for the fiscal year ended May 31,
1996. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
Class I Shares
YEAR ENDED MAY 31 1996 1995 1994 19931
Net Asset Value at
Beginning of Period $9.93 $9.73 $9.97 $10.00
Net Investment Income 0.64 0.66 0.53 0.03
Net Realized & Unrealized
Gain (Loss) on Securities (0.102) 0.176 (0.199) (0.060)
Total From Investment Operations 0.538 0.836 0.331 (0.030)
Distributions From
Net Investment Income (0.658) (0.636) (0.558) -
Distributions From
Realized Capital Gains - - (0.013) -
Total Distributions (0.658) (0.636) (0.571) -
Net Asset Value at End of Period $9.81 $9.93 $9.73 $9.97
Total Return+ 5.55% 9.08% 3.22% (3.60)%*
Net Assets at End
of Period (in 000's) $118,313 $51,102 $31,938 $2,245
Ratio of Expenses to
Average Net Assets** 0.35% 0.20% 0.07% -
Net Income to Average Net Assets 6.49% 6.89% 6.14% 3.85%*
Portfolio Turnover Rate 28.02% 57.06% 40.74% 8.89%
Class II Shares
YEAR ENDED MAY 31 19962
Net Asset Value at Beginning of Period $9.82
Net Investment Income 0.05
Net Realized & Unrealized Gain on Securities 0.004
Total From Investment Operations 0.054
Distributions From Net Investment Income (0.054)
Distributions From Realized Capital Gains -
Total Distributions (0.054)
Net Asset Value at End of Period $9.82
Total Return+ 0.54%
Net Assets at End of Period (in 000's) $212
Ratio of Expenses to Average Net Assets** .91%*
Net Income to Average Net Assets 5.73%*
Portfolio Turnover Rate 28.02%
1For the period May 3, 1993 (effective date) to May 31, 1993.
2For the period May 1, 1996 (effective date) to May 31, 1996.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or contingent deferred sales charge, and assumes reinvestment of
dividends and capital ga
*Annualized.
**During the periods indicated, Advisers agreed in advance to waive its
management fees and to pay certain other expenses. Had such action not been
taken, the ratio of operating expenses to average net assets would have been as
follows:
Class I Shares
19931 1.42%*
1994 0.87
1995 0.88
1996 0.81
Class II Shares
1996 1.81*
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund seeks to provide investors with a high level of income exempt from
federal and California personal income taxes by investing in municipal
securities in the lower-rated categories of the rating agencies such as Standard
& Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") and Fitch
Investors Service ("Fitch"), or in unrated municipal securities. As a secondary
objective, the Fund will seek capital appreciation to the extent that this is
possible and is consistent with its principal investment objective. The Fund's
investment objectives may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objectives will be achieved.
Because of the Fund's policy of seeking high current yield and its ability to
invest in lower-rated municipal obligations, 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.
The Fund will attempt to invest 100% and, as a matter of fundamental policy,
will invest at least 80% of its net assets in securities that pay interest
exempt from regular federal income taxes but that 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 from that
source to be paid by the Fund is considered to be a preference item under the
federal alternative minimum tax system and therefore subject to the federal
alternative minimum tax. As a result, if you are subject to the alternative
minimum tax, any dividends paid by the Fund that would otherwise be tax-exempt
may not be completely tax-exempt to you. Under these circumstances, an
investment in the Fund may not be appropriate for you. It is possible, although
not anticipated, that up to 20% of the Fund's net assets could be in taxable
obligations.
At least 65% of the Fund's total assets will be invested in municipal securities
issued by the state of California and its political subdivisions, agencies and
instrumentalities, and in non-state issuers that pay interest exempt from
regular federal and California personal income tax. It is possible, although not
anticipated, that up to 35% of the Fund's total assets may be in qualifying
municipal securities and obligations of other states or territories. It is also
possible for the Fund to be invested entirely in obligations that pay interest
subject to the federal alternative minimum tax.
The Fund may invest in municipal securities regardless of their rating,
including, from time to time, defaulted debt securities if, in the opinion of
Advisers, the issuer may resume interest payments or other advantageous
developments appear likely in the near term. The Fund may also invest in
municipal securities that are unrated but that are deemed to be of comparable
credit quality by Advisers. Higher yields are ordinarily available from
municipal securities in the lower-rated categories (BBB or lower by S&P or Fitch
or Baa or lower by Moody's) or from unrated securities of comparable quality.
Securities in the categories rated below investment grade 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 obligation.
The Fund will not invest more than 5% of its total assets, at the time of
purchase, in defaulted debt securities. If the rating on an issue held in the
Fund's portfolio is changed, this event will be considered by the Fund in its
evaluation of the overall investment merits of that security.
While it is expected that the Fund's portfolio will consist of lower-rated,
higher yielding bonds, the portfolio may also contain medium grade (BBB or Baa
rated), lower yielding bonds because adequate quantities of higher yielding,
lower-rated bonds acceptable to Advisers are not available at that time. There
may also be times when, due to unusual market conditions, or when the difference
in yields on higher and lower-rated bonds is narrowed so that the higher risk is
not justified by higher return, the Fund may acquire higher-rated bonds for its
portfolio.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with the Fund's investment
objectives and policies. When making these determinations, Advisers may (i)
interview representatives of the issuer at its offices, (ii) tour and inspect
the physical facilities of the issuer to evaluate the issuer and its operations,
(iii) perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
Under normal market conditions, the Fund will invest its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to 100%
of its net assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, the Fund may invest up to 100% of its net assets in (i)
municipal securities exempt from regular federal income taxes but not California
personal income tax, (ii) commercial paper rated at least A-1 by S&P, P-1 by
Moody's or F-1+ by Fitch, (iii) obligations issued or guaranteed by the full
faith and credit of the U.S. government or (iv) obligations of domestic banks
with assets of $1 billion or more.
Types of Securities the Fund May Invest In
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of a state, territory or possession 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 securities are issued to provide funding for
privately operated facilities.
The Fund has no restrictions on the maturities of municipal securities in which
it may invest. Advisers will consider the Fund's investment objectives 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 these 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) 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 and municipal securities
markets, the size of a particular offering, the maturity of the obligation, and
the credit rating of the issuer. Generally, municipal securities with longer
maturities produce higher current yields than municipal securities with shorter
maturities. Prices of longer-term municipal securities, however, typically
fluctuate more than those of short-term securities due to changes in interest
rates, tax laws and other general market conditions. 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.
PRIVATE ACTIVITY BONDS. 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 issued
after August 7, 1986, while still tax-exempt, constitutes a preference item for
taxpayers in determining the federal alternative minimum tax under the Code, and
under the income tax provisions of some states. This interest may subject you
to, or increase your liability under, the federal alternative minimum tax. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject corporate shareholders to, or increase their liability
under, the federal alternative minimum tax because these 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 private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to the Fund. As of May 31,
1996, the Fund had derived 12.28% of its income from bonds, the interest on
which constitutes a preference item subject to the federal alternative minimum
tax for certain investors.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in variable or floating rate demand notes
("VRDNs") 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.
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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if it is
considered advisable. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
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
objectives and policies and not for the purpose of investment leverage.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these 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 proceeds of a
bond called under these circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of the
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 the bonds were redeemed.
CERTIFICATES OF PARTICIPATION. The Fund may 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. A COP is created
when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities that are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the obligations issued to buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that distinguishes COPs from municipal debt is that the lease that is
the sub-
ject of the transaction contains a "nonappropriation" clause. A nonappropriation
clause provides that, while the municipality will use its best efforts to make
lease payments, the municipality may terminate the lease annually without
penalty if the municipality's appropriating body does not allocate the necessary
funds. Local administrations, when faced with increasingly tight budgets, have
more discretion to curtail payments under COPs than they do to curtail payments
on traditionally funded debt obligations. If the government lessee does not
appropriate sufficient monies to make lease payments, the lessor or its agent is
typically entitled to repossess the property. The private sector value of the
property may be more or less than the amount the government lessee was paying.
The Board reviews the COPs held in the Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by Advisers and
monitored by the Board. These factors include (a) the credit quality of the
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 ratings required for the Fund's investments, 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, 1996, the Fund held
11.63% of its net assets in COPs and other municipal leases.
Other Investment Policies of the Fund
BORROWING. The Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. The Fund may also, consistent with
procedures approved by the Board, lend its portfolio securities to qualified
securities dealers or other institutional investors, if 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.
ILLIQUID INVESTMENTS. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Special Factors Affecting California
Some of the economic factors that may affect California are summarized below.
The information is based primarily on information from credit reports and public
documents relating to securities offerings of California state and municipal
issuers. This information has not been independently verified by the Fund nor is
it intended to be comprehensive. More information is included in the SAI.
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
(according to value) taxes on real property and restricts the ability of taxing
entities to increase real property taxes. Legislation passed after Proposition
13 went into effect, 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 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, it would provide enough
revenue for 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 a limit
imposed for each state and local government entity. If revenues exceed the
appropriations limit, those revenues must be returned either as revisions in the
tax rates or fee schedules.
The national recession of the late 1980s severely affected California and its
effects have lingered. The magnitude of California's military-industrial complex
and effects of the recession resulted in a loss of more than 700,000 jobs.
During 1994, however, the state's economy paralleled the broad-based expansion
occurring on the national level. In 1995 the state's economy outperformed
expectations, with job growth rate exceeding the national average. Over 300,000
new jobs were added in 1995, with continued growth expected in 1996-97. The
unemployment rate as of March 1996 was 7.7%. The per capita income for the
state, adjusted for inflation, is not expected to return to pre-recession levels
until sometime in 1997.
In early July 1994, both S&P and Moody's had lowered the bond ratings A+ to A
and Aa to A1, respectively. In July 1996, S&P raised the credit rating on
California's municipal and general obligation bonds from A to A+. This upward
revision reflects the state's economic improvement and a balanced 1996-1997
budget.
High Yielding, Fixed-Income Municipal Securities.
Because of the Fund's ability to invest in municipal securities rated below
investment grade and unrated securities of comparable quality, an investment in
the Fund is subject to a higher degree of risk than is present with an
investment in higher rated securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. You should also consider the increased risk of loss to principal that is
present with an investment in higher risk securities such as those in which the
Fund invests.
The market value of lower rated municipal securities and unrated securities of
comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated municipal
securities are considered by the rating agencies, 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 triple B by S&P, Moody's or Fitch, ratings
which are considered investment grade, possess some speculative characteristics.
Projects financed by the issuance of high yielding municipal 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 these periods, such projects may not have
sufficient cash flow to meet their interest payment obligations. The issuer's
ability to service its obligations may also be adversely affected by specific
developments affecting the issuer, the issuer's inability to meet specific
projected revenue forecasts, or the unavailability of additional financing.
The risk of loss due to default may be significantly greater for the holders of
high yielding securities. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have unrealized
losses on such defaulted securities that are reflected in the price of the
Fund's shares. In general, securities that 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 that has defaulted
because the issue may present an opportunity for price recovery at a later date.
The premature disposition of a high yielding security due to a call or buy-back
feature, the decline of the issuer's creditworthiness, or a default may make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. The Fund may be required under the Code and U.S.
Treasury regulations to accrue income for income tax purposes on defaulted
obligations and to distribute the income to the Fund's shareholders even though
the Fund is not currently receiving interest or principal payments on the
obligations. In order to generate cash to satisfy any or all of these
distribution requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
The Fund may have difficulty selling certain high yielding securities because
there may be a thin trading market for the security at any given time. If a
secondary trading market for a particular security exists, 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 the issue, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as a decline
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 values 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. Please see "How Are Fund Shares Valued?" in the SAI.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993 depressed the prices for many of these securities. Factors adversely
impacting the market value of high yielding securities may adversely impact the
Fund's Net Asset Value. The Fund may also 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 Advisers'
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, Advisers will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its credit history, the quality of the issuer's management and
regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to lower
rated zero-coupon and deferred interest bonds. These bonds carry an additional
risk in that, unlike bonds that pay interest throughout the period to maturity,
the Fund will realize no cash until the cash payment date and, if the issuer
defaults, the Fund may obtain no return at all on its investment. Zero-coupon
and deferred interest bonds involve additional special considerations.
Zero-coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero-coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero-coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero-coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Further information is included under "How
Taxation Affects You and the Fund."
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the Fund's assets invested in municipal securities rated in
each of the specific rating categories shown and those that are not rated by the
rating agency but deemed by Advisers to be of comparable 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, 1996. The Appendix to this prospectus includes a
description of rating categories. Additional agency rating descriptions are
included in the SAI.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 7.2%
AA 5.6
A 32.8
BBB 12.8
BBB* 17.0
BB* 23.8
B* 0.7
*Not rated by the rating agency. Indicates an internal rating by Advisers.
CREDIT AND MARKET RISK. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
NON-DIVERSIFICATION RISK. The Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there are no restrictions under the
1940 Act on the percentage of assets that may be invested at any time in the
securities of any one 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 it
was more broadly diversified. The Fund intends, however, to comply with the
diversification 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 they are derived from interest on municipal securities. For this
reason,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, with
the exception of obligations of the U.S. government, or with respect to 50% of
its total assets, more than 5% of its total assets would be invested in the
securities of a single issuer, with the exception of obligations of the U.S.
government.
Who Manages the Fund?
THE BOARD. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Thomas Kenny since 1994 and Bernie Schroer since inception.
Thomas Kenny
Senior Vice President
and Portfolio Manager of Advisers
Mr. Kenny is Director of Franklin's Municipal Bond Department. He received a
Bachelor of Arts degree in businfess and economics from the University of
California at Santa Barbara and a Master of Science degree in finance from
Golden Gate University. Mr. Kenny joined Franklin in 1986. He is a member of
several municipal securities industry-related committees and associations.
Bernard Schroer
Vice President and
Portfolio Manager
of Advisers
Mr. Schroer has a Bachelor degree in finance from Santa Clara University. He has
been with Advisers since 1987. From 1974 to 1984, he was the manager of trading
at Kidder, Peabody and company, Inc. Mr. Schroer is a member of various
municipal securities industry-related committees and associations.
SERVICES PROVIDED BY ADVISERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
During each of the fiscal years ended May 31, 1995 and 1996, management fees,
before any advance waiver, totaled 0.62% of the average monthly net assets of
the Fund. Total operating expenses, including management fees before any advance
waiver, totaled 0.88% and 0.81%, respectively, of the average monthly net assets
of Class I of the Fund. Pursuant to an agreement by Advisers to waive or limit
its fees, the Fund did not pay a management fee for the fiscal year ended May
31, 1995 and paid a fee totaling 0.16% of the average monthly net assets of the
Fund for the fiscal year ended May 31, 1996. Operating expenses totaled 0.20%
and 0.35% for Class I of the Fund for the respective periods. The annualized
total expenses for Class II of the Fund for the fiscal year ended May 31, 1996
was 0.91%. Advisers may end this arrangement at any time upon notice to the
Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not currently exceed 0.10% per
year of Class I's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Each class may also advertise its taxable-equivalent
yield and distribution rate. Performance figures are usually calculated using
the maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund. The taxable-equivalent yield and distribution rate show the before-tax
yield or distribution rate that would have to be earned from a taxable
investment to equal the yield or distribution rate of the class, assuming one or
more tax rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a non-diversified series of Franklin Municipal Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust and registered with the SEC
under the 1940 Act. The Fund began offering two classes of shares on May 1,
1996: Franklin California High Yield Municipal Fund - Class I and Franklin
California High Yield Municipal Fund - Class II. All shares purchased before
that time are considered Class I shares. Additional classes of shares may be
offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of the Trust for matters that affect the Trust as a whole. In the future,
additional series or classes may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify 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, 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 to you.
Dividends paid by the Fund that derive 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)
exempt from regular federal and California personal income tax, will not be
subject to either federal or California personal income tax when received by
you. 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 exempt obligations at the end of each quarter of its
fiscal year. In addition, dividends that derive from direct obligations of the
federal government, will also be exempt from California personal income taxes.
If you are a corporate taxpayer subject to the California franchise tax,
however, all distributions will be fully taxable.
Dividends paid by the Fund that derive 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, are treated as ordinary income whether you
have elected to receive them in cash or in additional shares.
From time to time, the Fund may buy 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 the 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 to you by
the Fund of such ordinary income will be subject to regular federal and state
income taxes in your hands. 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 you
until the following January, will be treated, for tax purposes, as if you
received them 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 you have owned Fund shares and whether you receive the
distributions in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you 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 the shares and
will be disallowed to the extent of exempt interest dividends paid with respect
to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes, 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. If you have not held the Fund shares 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 your investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includable in the tax base for determining the
extent to which any social security or railroad retirement benefits you receive
will be subject to regular federal income tax. You are required to disclose the
receipt of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred by you (directly or indirectly) to purchase or
carry Fund shares may not be fully deductible for federal income tax purposes.
If you are not a U.S. person for purposes of federal income taxation you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes to distributions you receive 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. You should
consult your tax advisor with respect to the applicability of other state and
local income taxes to your Fund shares and to distributions and redemption
proceeds you receive from the Fund. Whether you are a corporate, individual or
trust shareholder, you should contact your tax advisor to determine the impact
of Fund dividends and capital gain distributions under the federal alternative
minimum tax that may be applicable to your particular tax situation.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
We may refuse any order to buy shares. Currently, the Fund does not allow
investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- -If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1 or 2
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 3:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if (a)
the investment objectives were similar to the Fund's, and (b) your shares in
that fund were subject to any front-end or contingent deferred sales charges at
the time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
7. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of these payments for each
qualifying purchase. Securities Dealers who receive payments under items 1 and 2
below will earn the Rule 12b-1 fee associated with the purchase starting in the
thirteenth calendar month after the purchase. The payments described below are
paid by Distributors or one of its affiliates, at its own expense, and not by
the Fund or its shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 5 and 6 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT(S). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund. How Do I Sell
Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have additional requirements.
BY PHONE Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and
sent to us the
telephone redemption
agreement included
with this prospectus)
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a separate
agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
THROUGH YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days prior to the reinvestment
date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II' System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 175 and 275.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded. Glossary
Useful Terms and Definitions
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees.
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
EXCHANGE - New York Stock Exchange
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin
Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - 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
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendix
Description of Municipal Bond Ratings by S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: 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.
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, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ............. 2
Investment Restrictions .......................... 4
Officers and Trustees ............................ 5
Investment Advisory and Other Services ........... 8
How Does the Fund Buy
Securities For Its Portfolio? ................... 9
How Do I Buy, Sell and Exchange Shares? .......... 10
How Are Fund Shares Valued? ...................... 12
Additional Information on
Distributions and Taxes ......................... 13
The Fund's Underwriter ........................... 14
How Does the Fund Measure Performance? ........... 16
Miscellaneous Information ........................ 19
Financial Statements ............................. 20
Useful Terms and Definitions ..................... 20
Appendices
Description of Ratings .......................... 21
Special Factors Affecting Each State Fund ....... 24
When reading this SAI, you will see certain terms in capital letters. This means
the term is explained under "Useful Terms and Definitions."
The Franklin Municipal Securities Trust (the "Trust") is an open-end management
investment company with five separate, non-diversified series. The California
Fund offers two classes of shares.
Each Fund may separately or collectively be referred to as the "Fund" or
"Funds," or individually by the state referenced in its name.
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 that 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 achieve its objective by investing primarily in municipal
securities issued by its respective state and the state's political
subdivisions, agencies and instrumentalities that pay interest exempt from such
state's personal income taxes (if any) and regular federal income taxes.
The Prospectus for the California Fund and the Prospectus for the Arkansas,
Hawaii, Tennessee and Washington Funds, both dated October 1, 1996, as may be
amended from time to time, contain the basic information you should know before
investing in the Fund. For a free copy, call 1-800/DIAL BEN or write the Fund at
the address shown.
THIS 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 YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUSES.
Mutual funds, annuities, and other investment products:
o are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency of the U.S. government;
o are not deposits or obligations of, or guaranteed or endorsed by any bank;
o are subject to investment risks, including the possible loss of principal.
MUN SAI 10/96
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectuses entitled "How Does the Fund Invest Its Assets?"
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
Tax Anticipation Notes. These are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes. These 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. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes. These 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.
Tax-Exempt Commercial Paper. These typically represent a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
Municipal Bonds that 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. The principal security behind these bonds may vary. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, and/or the
net revenues from housing or other public projects. Many bonds provide
additional security in the form of a debt service reserve fund, from which money
may be used to make principal and interest payments on the issuer's obligations.
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.
Tax-Exempt Industrial Development Revenue Bonds. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They 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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the Prospectuses,
VRDNs are tax-exempt obligations that 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 the instrument. The interest rates are adjustable at intervals ranging from
daily up to monthly, and are calculated to maintain the market value of the VRDN
at approximately its par value upon the adjustment date.
Zero-Coupon Securities. A Fund's investment in zero-coupon and delayed interest
bonds may cause the 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 specified
maturity date.
Because zero-coupon securities bear no interest and compound semiannually 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, zero-coupon securities fall more dramatically
than bonds paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in value, because
the bonds reflect a fixed rate of return.
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. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to buy is made, but delivery and payment for
the when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is the Fund's intention to be fully invested to the extent
practicable and subject to its investment policies. While when-issued securities
may be sold prior to the settlement date, the Fund intends to buy such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
believes that its net asset value or income will not be adversely affected by
its purchase of municipal bonds on a when-issued basis. The Fund will establish
a segregated account in which it will maintain cash and marketable securities
equal in value to its commitments for when-issued securities.
Escrow-Secured Bonds or Defeased Bonds. These are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue that 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 buy high grade,
interest-bearing debt securities that 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 triple-A rating from Standard & Poor's Corporation ("S&P"), Moody's
Investors Service ("Moody's") and Fitch Investors Service ("Fitch").
Commercial Paper. 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 that are similar to the foregoing described municipal securities in
which the Funds may also invest, to the extent such investments would be
consistent with the Funds' objectives and policies.
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 U.S. itself
in the event the agency or instrumentality does not meet its commitments.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
loans do not exceed 10% of the value of the Fund's total assets at the time of
the most recent loan. The borrower must deposit with the Fund's custodian bank
collateral with an initial market value of at least 102% of the initial market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The 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.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
Municipal securities issued to finance non-governmental business activities 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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
* Harmon E. Burns (51) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 60 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
* Charles B. Johnson (63) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 56 of the investment companies in the Franklin Templeton Group of Funds.
* Rupert H. Johnson, Jr. (56) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 60 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); 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; and formerly held the following positions: Chairman,
Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.
Hayato Tanaka (79) Trustee
277 Haihai Street
Hilo, HI 96720
Retired, former owner of The Jewel Box Orchids; and director or trustee, as the
case may be, of two of the Franklin Group of Funds.
Kenneth V. Domingues (64) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 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 (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer, director and/or trustee of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 60 of the investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
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 39 of the investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (33) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board, may in the
future, but are not currently, paid fees. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Received from the Templeton Group
Franklin Templeton of Funds on Which
Name Group of Funds* Each Serves**
Frank H. Abbott, III..... $162,420 31
Harris J. Ashton......... 327,925 55
S. Joseph Fortunato...... 344,745 57
David Garbellano......... 146,100 30
Frank W.T. LaHaye........ 143,200 26
Gordon S. Macklin........ 321,525 52
Hayato Tanaka............ 500 2
*For the calendar year ended December 31, 1995.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 60 registered investment companies, with approximately 166 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly,
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of September 5, 1996, the officers and Board members, as a group, owned of
record and beneficially approximately 51,588.161 shares, or less than 1% of the
California Fund's total outstanding shares. Many of the Board members also own
shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle,
respectively, of Charles E. Johnson.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 124 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Fund's Code of Ethics.
Management Fees. Under its management agreement, each Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (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) of 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
at the close of business on the last business day of each month. Each class of
the California Fund will pay its proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
Advisers has agreed in advance to limit or waive its management fees and make
certain payments to reduce expenses. The table below shows the management fees,
before any advance waiver, and the management fees paid by each Fund for the
three fiscal years ended May 31, 1996.
Management Management
Fees (before Fees Paid
fee waiver) by the Fund
1996
Arkansas Fund............... $ 37,533 $ 0
California Fund............. 473,616 125,182
Hawaii Fund................. 240,276 52,175
Tennessee Fund.............. 58,834 3,936
Washington Fund............. 38,934 0
1995
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
Arkansas Fund............... $ 1,175 $ 0
California Fund............. 111,130 0
Hawaii Fund................. 152,252 0
Tennessee Fund.............. 1,181 0
Washington Fund............. 22,669 0
Management Agreement. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended May 31,
1996, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
for the fiscal year ended May 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The 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 provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the 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 the Fund.
During the fiscal years ended May 31, 1994, 1995, and 1996, the Funds paid no
brokerage commissions.
As of May 31, 1996, the Funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectuses.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000.................................. 3%
$30,000 but less than $100,000................. 2%
$100,000 but less than $400,000................ 1%
$400,000 or more............................... 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million. These
breakpoints are reset every 12 months for purposes of additional purchases.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectuses. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
Letter have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on the
amount actually purchased (less redemptions) during the period. If you execute a
Letter prior to a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectuses.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectuses.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the first business day of the month in
which a payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
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 Fund 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.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities that are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by Advisers. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. In the absence of a sale or reported bid and ask prices,
information with respect to bond and note transactions, quotations from bond
dealers, market transactions in comparable securities, and various relationships
between securities are used to determine the value of municipal securities.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the Exchange. The value of these securities used in computing the Net Asset
Value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the Exchange that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
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 carry forward or post
October loss deferral) 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 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 gains in any year or
adjust the timing of these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the 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 its tax-exempt interest
dividends) to shareholders will be taxable to the extent of the Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12-month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to shareholders by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Funds and received by you 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 your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, 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, 1996, 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 the 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 buying 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 Funds (defined under "Useful Terms and
Definitions") 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 your tax basis of the shares acquired
in the reinvestment. You should consult with your tax advisor concerning the tax
rules applicable to your 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 the 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 the
Fund to invest in these obligations, the Fund is authorized to so invest for
temporary or defensive purposes. To the extent these investments are made, the
Fund will provide you with the percentage of any dividends paid that may qualify
for tax-free treatment at the end of each calendar year. You should consult with
your tax advisor with respect to the application of your 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.
If you are defined in the Code as "a substantial user" (or a related person) of
facilities financed by private activity bonds you should consult with your tax
advisor before purchasing shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the Fund's
shares. The underwriting agreement will continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund shares, the following table sets
forth aggregate underwriting commissions, the net underwriting discounts and
commissions retained by Distributors, after allowances to dealers, and
compensation received by Distributors in connection with redemptions or
repurchases of Fund shares for the fiscal years ended May 31, 1994, 1995, and
1996.
Total Com-
pensation
Received in
Total Com- Net Under- Connection
missions writing Com- with Redemp-
Received by missions tions and
Distributors Retained Repurchases
1996
Arkansas Fund $ 132,475 $ 8,788 $ 0
California Fund 2,162,896 143,678 0
Hawaii Fund 191,062 11,951 0
Tennessee Fund 257,628 17,387 0
Washington Fund 63,035 4,267 0
1995
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 --
Total Com-
pensation
Received in
Total Com- Net Under- Connection
missions writing Com- with Redemp-
Received by missions tions and
Distributors Retained Repurchases
1994
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 --
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Hawaii Fund may pay up to a
maximum of 0.10% per year of its average daily net assets, payable quarterly,
for expenses incurred in the promotion and distribution of Class I shares.
Arkansas, California, Tennessee and Washington Funds may each pay up to a
maximum of 0.15% per year of its average daily net assets.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan for the California Fund, the Fund
pays Distributors up to 0.50% per year of Class II's average daily net assets,
payable quarterly, for distribution and related expenses. These fees may be used
to compensate Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All distribution expenses over
this amount will be borne by those who have incurred them without reimbursement
by the Fund.
Under the Class II Plan, the California Fund also pays an additional 0.15% per
year of Class II's average daily net assets, payable quarterly, as a servicing
fee. During the first year after a purchase of Class II shares, Distributors may
keep this portion of the Rule 12b-1 fees associated with the Class II purchase.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended May 31, 1996, Distributors' eligible expenditures for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the Class I plans and the amounts paid by the Fund to Distributors were as
follows:
Distributors' Amount
Eligible Paid By
Expenses the Fund
Arkansas Fund................... $ 6,666 $ 3,126
California Fund*................ 307,166 63,621
Hawaii Fund..................... 42,589 28,850
Tennessee Fund.................. 10,997 6,103
Washington Fund................. 7,336 3,369
*The California Fund began issuing Class II shares on May 1, 1996. No Rule 12b-1
fee payment for Class II shares has been made through fiscal year end May 31,
1996.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. 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.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one, five and ten-year periods,
or fractional portion thereof, that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes the maximum
front-end sales charge is deducted from the initial $1,000 purchase, and income
dividends and capital gain distributions are reinvested at Net Asset Value. The
quotation assumes the account was completely redeemed at the end of each one,
five and ten-year period and the deduction of all applicable charges and fees.
If a change is made to the sales charge structure, historical performance
information will be restated to reflect the maximum front-end sales charge
currently in effect.
The average annual total return for Class I shares for the one-year period and
for the period from inception of each Fund's Class I shares to May 31, 1996,
were as follows:
Average Annual Total Return
Inception From
of Fund One-Year Inception
Arkansas Fund.......... 05/10/94 0.19% 3.80%
California Fund........ 05/03/93 1.07% 4.13%
Hawaii Fund............ 02/26/92 0.09% 5.94%
Tennessee Fund......... 05/10/94 0.04% 4.77%
Washington Fund........ 05/03/93 0.44% 3.34%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
Cumulative Total Return. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one, five and ten-year periods, or fractional portion thereof. The
cumulative total return for each class for the one-year period and for the
period from inception ended May 31, 1996 were as follows:
Cumulative Total Return
Inception From
Class I of Fund One-Year Inception
Arkansas Fund.......... 05/10/94 0.19% 8.00%
California Fund........ 05/03/93 1.07% 13.30%
Hawaii Fund............ 02/26/92 0.09% 27.89%
Tennessee Fund......... 05/10/94 0.04% 10.10%
Washington Fund........ 05/03/93 0.44% 10.67%
Inception of From
Class II Class II Shares Inception
California Fund........ 05/01/96 (1.46)%
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended May 31, 1996, was as follows:
30-Day
Current Yield
Class I Class II
Arkansas Fund......................... 5.53% n/a
California Fund....................... 6.12% 6.24%
Hawaii Fund........................... 5.53% n/a
Tennessee Fund........................ 5.41% n/a
Washington Fund....................... 5.27% n/a
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
Taxable-Equivalent Yield. The Fund may also quote a taxable-equivalent yield for
each class that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate and
adding the product to the portion of the class' yield that is not tax-exempt, if
any. The taxable-equivalent yield for each class for the 30-day period ended May
31, 1996, was as follows:
30-Day
Taxable-
Equivalent Yield
Class I Class II
Arkansas Fund....................... 9.85% n/a
California Fund..................... 11.17% 11.39%
Hawaii Fund......................... 10.17% n/a
Tennessee Fund...................... 9.53% n/a
Washington Fund..................... 8.73% n/a
As of the date of this SAI, the state and combined state and federal income tax
rates upon which the taxable-equivalent yield quotations are based were as
follows:
State Combined
State Tax Tax*
Arkansas Fund..................... 7.00% 43.83%
California Fund................... 9.30% 45.22%
Hawaii Fund....................... 10.00% 45.64%
Tennessee Fund.................... 6.00% 43.22%
Washington Fund................... 0.00%** 39.60%
*Based on the maximum combined state and 39.6% federal tax rate.
**The state of Washington currently has no state income tax.
From time to time, as any changes to the rates become effective,
taxable-equivalent yield quotations advertised by the Fund will be updated to
reflect these changes. The Fund expects updates may be necessary as tax rates
are changed by the federal, state and local governments. The advantage of
tax-free investments, like the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
CURRENT DISTRIBUTION RATE
Current yield and taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders of a class. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable-equivalent
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than interest, such as
short-term capital gains and is calculated over a different period of time. The
current distribution rates for each class for the 30-day period ended May 31,
1996, were as follows:
Current
Distribution
Rate
Class I Class II
Arkansas Fund......................... 5.52% n/a
California Fund....................... 6.44% 6.08%
Hawaii Fund........................... 5.45% n/a
Tennessee Fund........................ 5.52% n/a
Washington Fund....................... 5.63% n/a
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal,
state and city tax rates available to the Fund. The taxable-equivalent
distribution rates for each class for the 30-day period ended May 31, 1996, were
as follows:
Taxable-Equivalent
Distribution Rate
Class I Class II
Arkansas Fund....................... 9.83% n/a
California Fund..................... 11.76% 11.10%
Hawaii Fund......................... 10.03% n/a
Tennessee Fund...................... 9.72% n/a
Washington Fund..................... 9.32% n/a
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
The Fund may include in its 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 advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate, and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage, and
Yankee bonds.
c) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
d) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
f) Bond Buyer 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, 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 -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, 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 in the U.S. Savings &
Loan League Fact Book.
m) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its class.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as saving for a down
payment on a home, college costs and other long-term goals. The Franklin College
Costs Planner may help you in determining how much money must be invested on a
monthly basis in order to have a projected amount available in the future to
fund a child's college education. (Projected college cost estimates are based
upon current costs published by the College Board.) Of course, an investment in
the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 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 $145
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public.
The Fund may identify itself by its NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$43 billion in municipal bond assets for over three quarters of a million
investors. According to Research and Ratings Review, Franklin's municipal
research team ranked number 2 out of 800 investment advisory firms surveyed by
TMS Holdings, Inc. as of March 31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight 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 annual amount of time the average taxpayer works to
satisfy his or her tax obligations to the federal, state and local taxing
authorities.
As of September 6, 1996, the principal shareholders of the Fund, beneficial or
of record, were as follows:
SHARE
FUND, NAME AND ADDRESS AMOUNT PERCENTAGE
ARKANSAS FUND -
CLASS I
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404 246,428.245 27.61%
HAWAII FUND - CLASS I
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404 256,951.774 6.91%
Liu Chang &
Lucy C H Chang
JTWROS
1525 Wilder Avenue #1108
Honolulu, HI 96822-4687 468,603.561 12.61%
TENNESSEE FUND -
CLASS I
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404 246,633.069 15.52%
WASHINGTON FUND -
CLASS I
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404 263,176.306 32.94%
Genevieve Evans
3226 N 19th
Tacoma, WA 98406 40,025.184 5.00%
CALIFORNIA FUND -
CLASS II
James C. McCarty III
P.O. Box 1401
Sausalito, CA 94966 76,204.341 15.97%
Douglas R. Schuch &
Cynthia S. Schuch
JTWROS
5041 Jardin Lane
Carmichael, CA 95608 29,648.241 6.21%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, 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 IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended May 31, 1996, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin
Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Prospectus(es) - The prospectus for the California Fund and/or the prospectus
for the Arkansas, Hawaii, Tennessee and Washington Funds, both dated October 1,
1996, as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - 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
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDICES
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Municipal bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: 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
AAA: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefor impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by 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'S
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
SPECIAL FACTORS AFFECTING EACH STATE FUND
The following information supplements the summaries of state economic factors in
the prospectus. This information is based on historically reliable sources such
as S&P's Creditweek Municipal, but it has not been independently verified by the
Trust, nor is it intended to be complete.
ARKANSAS
Arkansas has consistently maintained a balanced budget and a conservative
approach to its financial operations. Under the state's Revenue Stabilization
Act and other laws enacted in the early 1970s, all general obligation debt must
be authorized by voters, restrictions are placed on the total amount of debt
that can be issued during any two year budget cycle, and the state is prohibited
from engaging in deficit spending (i.e. spending cannot exceed revenues in any
fiscal year.) As a result, Arkansas has maintained one of the lowest debt loads
of the states, despite notable increases since 1990, with debt per capita equal
to $386.
During fiscal 1994, revenues collected exceeded 1993 levels by 9.3%.
Conservative estimates based on slower employment and income growth project
revenue growth of 4.6% for each of fiscal years 1995 and 1996 and 5.7% for
fiscal 1997. Through February, revenue collections for fiscal 1995 have actually
exceeded projections by 1.8%, with declines in revenues from corporate income
and alcoholic beverage taxes offset by increases in other tax categories.
Arkansas' employment growth has moderated in the last year, as has the nation's,
but it has exceeded the national rate since 1991 and continues to do so.
Employment growth for the 12 months ending January 1996 was 3.2%, while the
national rate was 2.1%. Arkansas ranked 13th in the nation in job growth over
this period. Unemployment in March 1996 was 5.4%, below the U.S. figure of 6.0%.
The outlook for Arkansas reflects expectations of continued slow but steady
economic growth, low wealth and income levels, very low general
revenue-supported debt, manageable debt issuance plans, and conservative
financial management. Job gains are evident in recent years and the state's
employment growth has been consistently above the national average since 1990.
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.
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.
Recently improved economic performance generated better-than-anticipated tax
revenues, more than offsetting failure to receive a budgeted increase in federal
aid and other shortfalls. Gains in exports, entertainment, tourism, and computer
services helped drive the recent recovery. The state legislative analyst's
office identifies $2.6 billion in proposed 1996 and 1997 budget savings
dependent on federal actions, mostly in health and welfare reform. However,
significant fiscal and structural pressures continue to hamper the state's
efforts to maintain financial stability, reflected in the month-late passage of
the 1996 budget, and likely difficult negotiations for the governor's proposed
1997 budget.
Strong service sector growth in the southern part of the state supports the
state's budgeted 5.7% personal income growth for 1996 and 5.9% for 1997, after
earlier sluggish conditions. Unemployment, however, remains above the national
average, although the gap has narrowed and is projected to close within 1% of
the national average in 1997.
Stronger-than-expected economic recovery offset unattainable federal aid in 1995
to end fiscal 1995 with a general fund deficit (budgetary basis) of $347
million, before the adjustment for school loans. The state's general fund cash
position before note borrowings improved to a negative $3.5 billion at fiscal
year-end 1995, but remains poor. Debt levels remain moderate, even including $5
billion in proposed new general obligation bonding authority on the 1996 March
ballot, despite the continued need for large, but reduced, short-term note
issuances. Debt service for fiscal 1995 was 5.3% of general fund expenditures
and net tax-supported general obligation and lease debt totals $754 per capita.
The state's economy outperformed expectations in 1995, and continuing positive
trends are projected for 1996-97. California's recovery is picking up steam at
the same time that the more mature national economic recovery is slowing. This
past year was the first since 1989 that the rate of job growth in California
exceeded the nation; this pace is projected to continue in 1996 and 1997. The
State Budget for Fiscal Year 1996-97 includes major funding increases for
education and public safety, with K-12 education receiving nearly $2.6 billion
in increased and ongoing general fund support, as well as a 5% cut in
California's corporate tax rate to improve California competitiveness.
Orange County. On December 6, 1994, Orange County, California (the "County"),
together with its pooled investment funds (the "Investment Pools") filed for
protection under Chapter 9 of the federal Bankruptcy Code after reports that the
Investment Pools had suffered significant market losses in their investments
which caused a liquidity crisis for the Investment Pools 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 Investment Pools. As of mid-January 1995,
following a restructuring of most of the Investment Pools' assets to increase
their liquidity and reduce their exposure to interest rate increases, the County
estimated the Investment Pools' 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 that deposited money in the Investment Pools, 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 (the "Court") approved a settlement between the County and the
Pool participants that provided for Pool participants to receive an initial cash
distribution of 77% of their aggregate investment balance plus a combination of
recovery notes and other claims. As of May 31, 1996, the Fund did not own any
direct Orange County obligations.
On May 15, 1996, the County's Modified Second Plan of Adjustment (the "Plan")
was confirmed by the Court. On June 12, 1996, the Plan became effective and the
County emerged from bankruptcy. The Plan provided for payment in full of all the
County's short-term notes and provided that long-term bond debt would not be
impaired. The Plan further provided for subordination of the residual claims of
the Pool participants. The County is engaged in litigation with certain third
parties which the County alleges have culpability in connection with the
Investment Pools' losses and other related damages. The Plan provides a sharing
formula under which the net recoveries, if any, would be shared among the County
and the Pool participants. Although the Court retains jurisdiction over certain
matters under the Plan, particularly the resolution of claims, the County is no
longer subject to the oversight of the Court with respect to conduct of its
governmental affairs.
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
approximately $125 million from the amounts they had on deposit and amounts held
by the County on their behalf in the Investment Pools. 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 Investment Pools, and if so,
the potential amount or form of aid that the state may have to provide.
The outlook for California reflects brightening economic prospects offset by the
state's poor cash position and structural budget constraints. The wind-down of
military cutbacks, North American Free Trade Agreement (NAFTA) benefits, growth
in Pacific trade, high technology and a rebound in construction have helped pull
the state from its cyclical downturn.
HAWAII
Hawaii's economy is emerging slowly from a prolonged economic slump. As the rest
of the nation has emerged from the recession, state and local government has
continued to suffer as construction, foreign investment, and tourism have each
declined, with corresponding declines in tax revenues. While commercial
construction continues to lag, residential development has continued. Tourism
has been recovering with increasing traffic from the Pacific Rim nations.
Tourism from the mainland U.S. still accounts for the largest share of the
industry at nearly 60%. The total number of tourist grew a moderate 3.2% in 1995
to 6.6 million visitors. Employment data suggests the state lost a total of
about 10,000 jobs from 1992 to 1995, mostly in construction, manufacturing,
transportation and public utilities. Unemployment, however, as measured by a
household survey, declined to 5.4% in 1995. Income has declined, but remains
above the U.S.
average, with per capita personal income at 111% of the national average.
Hawaii's debt is high and growing. Overall net debt is $3,756 per capita and
annual servicing consumes nearly 11% of general resources. While debt at the
state level is high, overall debt is manageable as counties continue to have
relatively low debt burdens.
While the state's historically strong financial position has enabled it to
weather the prolonged recession and slow recovery, recent budget realignment
measures must be achieved.
TENNESSEE
Tennessee has historically had a sound financial position, though as in many
states, the recession has had a negative impact on revenues. Although the
recession produced shortfalls in fiscal years 1991 and 1992, renewed economic
growth, increased taxes, and cost controls in fiscal 1993 generated a $132
million general fund surplus and the rainy day revenue fluctuation fund was
restored to $150 million from $75 million in 1992. The level has been reduced
somewhat, to $101 million, as the state continues to phase-in the funding for
equalizing education. The state's economy has remained strong since 1992, with
revenue growth better than 9% in fiscal 1995. Estimates for the current year and
projection for the next fiscal year are more conservative, in the 5.5% range.
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. Costs associated with the program
have stabilized in fiscal 1996. Additional costs of the program this year and
next, associated with a decrease in the federal matching rate, are estimated to
be $30 million. Also included in the state's budget initiatives for fiscal
1995-1996 is continued implementation of the Education Improvement Act of 1992,
which guarantees a basic level of service for all primary and secondary school
students in the state under a Basic Education Program formula. Funding under the
Basic Education Program continues to be phased-in, being fully funded by July 1,
1998.
Debt issuance is limited by statute, additional general obligation bonds may
only be issued if pledged special revenues for the preceding fiscal year are at
least 1.5 times the peak annual debt service requirements on both new and
outstanding bonds. As of June 30, 1995, the debt service limit was $374 million
and the peak debt service was $112 million.
Tennessee has experienced increase diversification, contributing to employment
growth in excess of that for the U.S. Such expansion of employment has led to
growth in personal income that has surpassed the national average. Increases in
both employment and income are anticipated to remain above the national averages
over the next few years, as economic expansion, especially in automotive
manufacturing, is expected to continue.
WASHINGTON
During 1991, in response to economic softening, the state made downward
revisions in its economic and revenue forecasts for the 1991-93 biennium, and
enacted corresponding adjustments on the expenditure side of the budget. As a
result of the adjustments, the 1991-93 biennium closed with an ending unreserved
general fund balance of approximately $234 million, in addition to a $100
million balance in the budget stabilization fund (or "rainy day fund"). These
balances have decreased from the beginning of the 1993-1995 biennium, when the
unreserved fund balance and the rainy day fund stood at $468 million and $260
million, respectively.
The total 1993-95 biennial general fund budget was $16.3 billion, up 6% over the
1991-1993 biennium. On April 6, 1994, the governor signed a supplemental budget,
which included $168 million of additional spending for various one-time items,
including grants to local school districts. The state ended the 1993-1995
biennium with $455 million in the general fund.
In November 1993, voters approved Initiative 601, which will limit state
spending increases to the average of the rate of inflation and population growth
over the previous three years beginning with the 1995-1997 biennium. The impact
of Initiative 601 is expected to be significant but manageable. Since July 1,
1995, tax increases require a two-thirds vote of the legislature but only up to
the spending limit.
The total 1995-97 biennial general fund budget is $17.6 billion. The budget
successfully closed a gap reflecting new expenditures of approximately $2
billion necessary to keep up with growth in education enrollment, prison
populations, debt service and health care costs. The state addressed the $2
billion imbalance through a combination of expenditure reductions, program
restructuring, and increases in revenue, which included an expansion of the
sales tax base to include selected business services and an increase in the
business and occupation tax rate. In May 1995, the governor signed a
supplemental budget, which included revenue and expenditure adjustments and
initiated limits to program growth in anticipation of the July 1, 1995
implementation of Initiative 601. Presently, Washington does not have an income
tax and although from time to time one has been proposed, it was not seriously
considered during the 1995-97 biennial budget debate.
Washington weathered the recent recession better than the nation as a whole, and
the outlook for the 1995-1997 biennium is for improving growth trends. Boeing
has announced employment and production increases, and related businesses should
also see gains. Unemployment is slightly higher than the nation at 6.1% in March
1996, and is expected to hold steady through the rest of 1996, despite continued
labor force growth. The population continues to expand and growth is forecasted
to exceed the national average through the 1990s.
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 Shareholders, dated May 31, 1996 as
filed with the SEC on Form Type N-30D on July 31, 1996.
(i) Report of Independent Auditors.
(ii) Statements of Investments in Securities and Net Assets - May
31, 1996.
(iii)Statements of Assets and Liabilities - May 31, 1996.
(iv) Statements of Operations - for the year ended May 31, 1996.
(v) Statements of Changes in Net Assets - for the years ended
May 31, 1996 and May 31, 1995.
(c) Exhibits:
The following exhibits, are incorporated by reference as noted, except
exhibits 11(i), 13(i), 15(v), 18(i), 27(i), 27(ii), 27(iii), 27(iv), 27(v)
and 27(vi), which are filed herewith.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated December 10, 1991
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Certificate of Trust dated December 10, 1991
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(iii)Certificate of Amendment to Certificate of Trust dated May
14, 1992
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws of the Franklin Municipal Securities Trust
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Amendment to the By-Laws dated April 19, 1994
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: February 28, 1996
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(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;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc., dated February 26, 1992
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Amendment to Management Agreement between Registrant and
Franklin Advisers, Inc., dated August 1, 1995
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: February 28, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc., dated
April 23, 1995
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc., and securities dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
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;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
renumeration;
(i) Custodian Agreement between Registrant and Bank of America
NT & SA dated February 26, 1992
Filing: Post-Effective Amendment No. 54 to Registration on
Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(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 Asset Allocation Fund
Filing: Post-Effective Amendment No. 55 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(iii)Master Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 8 to
Registration Statement on form N-1A
File Nos. 33-44132- & 811-6481
Filing Date: February 28, 1996
(iv) Terminal Link Agreement between Registrant and
The Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 8 to
Registration Statement on form N-1A
File Nos. 33-44132- & 811-6481
Filing Date: February 28, 1996
(9) copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;
Not Applicable
(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;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
registration statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated September 20, 1996
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding on behalf of Franklin California High
Yield Municipal Fund dated April 30, 1996
(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;
Not Applicable
(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 Nos. 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 Nos. 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 Nos. 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 Nos. 33-44132 & 811-6481
Filing Date: March 11, 1994
(v) Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin California High Yield Municipal Fund dated
March 22, 1996
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not
be audited).
(i) Schedule for computation of performance quotation
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(17) Power of Attorney
(i) Power of Attorney dated March 15, 1995
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Certificate of Secretary dated March 15, 1995
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File Nos. 33-44132 & 811-6481
Filing Date: July 31, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule
18f-3 under the 1940 Act.
(i) Multiclass Plan on behalf of Franklin California High Yield
Municipal Fund dated March 21, 1996
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Franklin Hawaii Municipal Bond
Fund
(ii) Financial Data Schedule for Franklin California High Yield
Municipal Fund - Class I
(iii)Financial Data Schedule for Franklin California High Yield
Municipal Fund - Class II
(iv) Financial Data Schedule for Franklin Washington Municipal
Bond Fund
(v) Financial Data Schedule for Franklin Arkansas Municipal
Bond Fund
(vi) Financial Data Schedule for Franklin Tennessee Municipal
Bond Fund
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of June 30, 1996 the number of record holders of each class of
securities of the Registrant were as follows:
Number of Record holders
TITLE OF CLASS CLASS I CLASS II
Shares of Beneficial
Interest of Franklin Municipal
Securities Trust
Franklin Hawaii Municipal Bond Fund 968 N/A
Franklin California High Yield Municipal Fund 2,561 14
Franklin Washington Municipal Bond Fund 169 N/A
Franklin Arkansas Municipal Bond Fund 191 N/A
Franklin Tennessee Municipal Bond Fund 300 N/A
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court 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.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Group of Funds(R).
In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors
of the Investment Manager and information as to any business, profession,
vocation or employment of a substantial nature engaged in by those officers
and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
AGE High Income Fund, Inc.
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Securities Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of
this N-1A and Schedule A of Form BD filed by Distributors with the
Securities and Exchange Commission pursuant to the Securities Act of
1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the 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
(a) 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.
(b) The registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any trustee or trustees when requested in writing to do so by the
record holders of not less than 10 percent of the Registrant's
outstanding shares and to assist its shareholders in communicating
with other shareholders in accordance with the requirements of Section
16(c) of the Investment Company Act of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement Pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to its Registrant's 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 25th day of September,
1996.
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, Jr. Executive Officer
Dated: September 25, 1996
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: September 25, 1996
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: September 25, 1996
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: September 25, 1996
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: September 25, 1996
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: September 25, 1996
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: September 25, 1996
DAVID W. GARBELLANO* Trustee
David W. Garbellano Dated: September 25, 1996
CHARLES B. JOHNSON * Trustee
Charles B. Johnson Dated: September 25, 1996
FRANK W. T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: September 25, 1996
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: September 25, 1996
HAYATO TANAKA* Trustee
Hayato Tanaka Dated: September 25, 1996
*By/s/Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
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
EX-99.B1(ii) Certificate of Trust dated December 10, *
1991
EX-99.B1(iii) Certificate of Amendment to Certificate *
of Trust dated May 14, 1992
EX-99.B2(i) By-Laws of the Franklin Municipal *
Securities Trust
EX-99.B2(ii) Amendment to the By-Laws dated April 19, *
1994
EX-99.B5(i) Management Agreement between Registrant *
and Franklin Advisers, Inc., dated
February 26, 1996
EX-99.B5(ii) Amendment to Management Agreement between *
Registrant and Franklin Advisers, Inc.,
dated August 1, 1995
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
EX-99.B6(ii) Form of Dealer Agreement between *
Franklin/Templeton Distributors, Inc.,
EX-99.B8(i) Custodian Agreement between Registrant *
and Bank of America NT & SA
EX-99.B8(ii) Custodian Agreement between Registrant *
and Citibank Delaware
EX-99.B8(iii) Master Custody Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B8(iv) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding dated April 30, Attached
1996
EX-99.B15(i) Amended and Restated Distribution Plan *
dated July 1, 1993
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
EX-99.B15(iv) Amended and Restated Distribution Plan *
dated May 10, 1994
EX-99.B15(v) Class II Distribution plan pursuant to Attached
Rule 12b-1 on behalf of Franklin
California High Yield Municipal Fund
EX-99.B16(i) Schedule for computation of performance *
quotation
EX-99.B17(i) Power of Attorney dated March 15, 1995 *
EX-99.B17(ii) Certificate of Secretary dated March 15, *
1995
EX-99.B18(i) Multiclass Plan Attached
EX-27.B(i) Financial Data Schedule for Franklin Attached
Hawaii Municipal Bond Fund
EX-27.B(ii) Financial Data Schedule for Franklin Attached
California High Yield Municipal Fund -
Class I
EX-27.B(iii) Financial Data Schedule for Franklin Attached
California High Yield Municipal Fund -
Class II
EX-27.B(iv) Financial Data Schedule for Franklin Attached
Washington Municipal Bond Fund
EX-27.B(v) Financial Data Schedule for Franklin Attached
Arkansas Municipal Bond Fund
EX-27.B(vi) Financial Data Schedule for Franklin Attached
Tennessee Municipal Bond Fund
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
10 to the Registration Statement of Franklin Municipal Securities Trust on
Form N-1A File Nos. 33-44132 and 811-6481 of our report dated July 3, 1996 on
our audit of the financial statements and financial highlights of Franklin
Municipal Securities Trust, which report is included in the Annual Report to
Shareholders for the year ended May 31, 1996, which is incorporated by
reference in the Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
September 20, 1996
April 30, 1996
FRANKLIN MUNICIPAL SECURITIES TRUST 777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to purchase one share of the Class II shares (the "Shares") of
the FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (the "Fund"), a series of
FRANKLIN MUNICIPAL SECURITIES TRUST, on the business day immediately preceding
the effective date for Class II shares, at a purchase price per share equivalent
to the net asset value per share of the Fund's Class I shares on the date of
purchase. We will purchase the Share in a private offering prior to the
effectiveness of the post-effective amendment to the Form N-1A registration
statement under which the Fund's Class II shares are initially offered, as filed
by the Fund under the Securities Act of 1933. The Share is being purchased to
serve as the initial advance in connection with the operations of the Fund's
Class II shares prior to the commencement of the public offering of Class II
shares.
In connection with such purchase, we understand that we, the purchaser,
intend to acquire the Share for our own account as the sole beneficial owner
thereof and have no present intention of redeeming or reselling the Share so
acquired.
We consent to the filing of this Investment Letter as an exhibit to the
form N-1A registration statement of the Fund.
Sincerely,
FRANKLIN RESOURCES, INC.
By:/s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUNICIPAL SECURITIES TRUST
II. Fund: FRANKLIN CALIFORNIA HIGH YIELD
MUNICIPAL FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of
the Investment Company (the "Board"), including a majority of the Board
members who are not interested persons of the Investment Company and who have
no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement
between the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers,
under the Management Agreement, and of Distributors, under the Underwriting
Agreement, was fair and not excessive. The approval of the Plan included a
determination that in the exercise of their reasonable business judgment and
in light of their fiduciary duties, there is a reasonable likelihood that the
Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average
daily net assets represented by shares of the Class, as may be determined by
the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund
shall pay (i) to Distributors for payment to dealers or others, or (ii)
directly to others, an amount not to exceed the above-stated maximum service
fee per annum of the Class' average daily net assets represented by shares of
the Class, as may be determined by the Fund's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from
time to time by the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to
Paragraph 1(a) above to assist in the distribution and promotion of shares of
the Class. Payments made to Distributors under the Plan may be used for,
among other things, 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 pro-rated portion of Distributors' overhead expenses attributable to the
distribution of Class shares, as well as for additional distribution fees
paid to securities dealers or their firms or others who have executed
agreements with the Investment Company, Distributors or its affiliates, which
form of agreement has been approved from time to time by the Trustees,
including the non-interested trustees. In addition, such fees may be used to
pay for advancing the commission costs to dealers or others with respect to
the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall
be used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the
investment of their respective customers in the Class. Any amounts paid
under this paragraph 2(b) shall be paid pursuant to a servicing or other
agreement, which form of agreement has been approved from time to time by the
Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued
by the Fund within the context of Rule 12b-1 under the 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 specified in paragraphs 1 and 2, plus any other payments
deemed to be made pursuant to the Plan under this paragraph, 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. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies reimbursed to it and to
others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the
payments made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one
year only so long as such continuance is specifically approved at least
annually by the Board, including the non-interested Board members, cast in
person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan,
may be terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written
notice, or by Distributors on not more than sixty (60) days' written notice,
and shall terminate automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan,
may not be amended to increase materially the amount to be spent for
distribution pursuant to Paragraph 1 hereof without approval by a majority of
the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of
the Fund's non-interested Board members shall be committed to the discretion
of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: March 22, 1996
FRANKLIN MUNICIPAL SECURITIES TRUST
By:/s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By:/s/ Harmon E. Burns
FRANKLIN MUNICIPAL SECURITIES TRUST
ON BEHALF OF
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
MULTIPLE CLASS PLAN
This Multiple Class Plan (the "Plan") has been adopted by a majority
of the Board of Trustees of the Franklin Municipal Securities Trust (the
"Trust"), on behalf of Franklin California High Yield Municipal Fund. The Board
has determined that the Plan is in the best interests of each class and the Fund
as a whole. The Plan sets forth the provisions relating to the establishment of
multiple classes of shares for the Fund.
1. The Fund shall offer two classes of shares, to be known as
Franklin California High Yield Municipal Fund - Class I and Franklin California
High Yield Municipal Fund - Class II.
2. Class I shares shall carry a front-end sales charge ranging from 0% - 4.50%,
and Class II shares shall carry a front-end sales charge of 1.00%.
3. Class I shares shall not be subject to a contingent deferred
sales charge ("CDSC") except in the following limited circumstances. On
investments of $1 million or more, a contingent deferred sales charge of 1.00%
of the lesser of the then-current net asset value or the original net asset
value at the time of purchase applies to redemptions of those investments within
the contingency period of 12 months from the calendar month following their
purchase. The CDSC is waived in certain circumstances, as described in the
Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase shall
be assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the shares of Class
I. Such expenses include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of the Distributor's
overhead expenses attributable to the distribution of Class shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund for the Class, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who will provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after sale of shares, and, in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II shares, in a manner similar to that described above for Class I shares.
The Plans shall operate in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
section 26(d).
6. The only difference in expenses as between Class I and Class II
shares shall relate to differences in the Rule 12b-1 plan expenses of each
class, as described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the
Class I and Class II shares.
8. Shares of either Class may be exchanged for shares of another
investment company within the Franklin Templeton Group of Funds according to the
terms and conditions stated in each fund's prospectus, as it may be amended from
time to time, to the extent permitted by the Investment Company Act of 1940 and
the rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule 12b-1
Plan related to that Class.
10. On an ongoing basis, the Trustees pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the interests of the two classes of
shares. The Trustees, including a majority of the independent Trustees, shall
take such action as is reasonably necessary to eliminate any such conflict that
may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.
shall be responsible for alerting the Board to any material conflicts that
arise.
11. All material amendments to this Plan must be approved by a
majority of the Trustees of the Fund, including a majority of the Trustees who
are not interested persons of the Fund.
I, Deborah R. Gatzek, Secretary of the Franklin Funds, do hereby
certify that this Multiple Class Plan was adopted by Franklin Municipal
Securities Trust, on behalf of its series Franklin California High Yield
Municipal Fund, by a majority of the Trustees of the Trust on March 21, 1996.
/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, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> FRANKLIN HAWAII MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 37,324,560
<INVESTMENTS-AT-VALUE> 37,741,269
<RECEIVABLES> 1,067,947
<ASSETS-OTHER> 73,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,882,568
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77,819
<TOTAL-LIABILITIES> 77,819
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,107,431
<SHARES-COMMON-STOCK> 3,682,205
<SHARES-COMMON-PRIOR> 3,452,783
<ACCUMULATED-NII-CURRENT> 124,725
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (844,116)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 416,709
<NET-ASSETS> 38,804,749
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,289,084
<OTHER-INCOME> 0
<EXPENSES-NET> (132,344)
<NET-INVESTMENT-INCOME> 2,156,740
<REALIZED-GAINS-CURRENT> (122,116)
<APPREC-INCREASE-CURRENT> (371,355)
<NET-CHANGE-FROM-OPS> 1,663,269
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,147,284)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 593,700
<NUMBER-OF-SHARES-REDEEMED> (454,099)
<SHARES-REINVESTED> 89,821
<NET-CHANGE-IN-ASSETS> 1,977,381
<ACCUMULATED-NII-PRIOR> 115,269
<ACCUMULATED-GAINS-PRIOR> (722,000)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 240,276
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 320,445
<AVERAGE-NET-ASSETS> 38,322,450
<PER-SHARE-NAV-BEGIN> 10.670
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> (.128)
<PER-SHARE-DIVIDEND> (.602)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.540
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN MUNICIPAL SECURITIES TRUST MAY 31,1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND-CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 118,631,608
<INVESTMENTS-AT-VALUE> 118,673,431
<RECEIVABLES> 4,266,953
<ASSETS-OTHER> 327,673
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,268,057
<PAYABLE-FOR-SECURITIES> 4,498,311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 244,363
<TOTAL-LIABILITIES> 4,742,674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,509,777
<SHARES-COMMON-STOCK> 12,059,037
<SHARES-COMMON-PRIOR> 5,145,872
<ACCUMULATED-NII-CURRENT> 18,541
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,044,758)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,823
<NET-ASSETS> 118,525,383
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,186,021
<OTHER-INCOME> 0
<EXPENSES-NET> (263,277)
<NET-INVESTMENT-INCOME> 4,922,744
<REALIZED-GAINS-CURRENT> (275,621)
<APPREC-INCREASE-CURRENT> (1,356,026)
<NET-CHANGE-FROM-OPS> 3,291,097
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,000,226)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,327,567
<NUMBER-OF-SHARES-REDEEMED> (1,602,938)
<SHARES-REINVESTED> 188,536
<NET-CHANGE-IN-ASSETS> 67,423,841
<ACCUMULATED-NII-PRIOR> 96,559
<ACCUMULATED-GAINS-PRIOR> (1,769,137)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 473,616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 611,711
<AVERAGE-NET-ASSETS> 75,866,425
<PER-SHARE-NAV-BEGIN> 9.930
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> (.102)
<PER-SHARE-DIVIDEND> (.658)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.810
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN MUNICIPAL SECURITIES TRUST MAY 31,1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND-CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 118,631,608
<INVESTMENTS-AT-VALUE> 118,673,431
<RECEIVABLES> 4,266,953
<ASSETS-OTHER> 327,673
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 123,268,057
<PAYABLE-FOR-SECURITIES> 4,498,311
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 244,363
<TOTAL-LIABILITIES> 4,742,674
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,509,777
<SHARES-COMMON-STOCK> 21,617
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 18,541
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,044,758)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,823
<NET-ASSETS> 118,525,383
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,186,021
<OTHER-INCOME> 0
<EXPENSES-NET> (263,277)
<NET-INVESTMENT-INCOME> 4,922,744
<REALIZED-GAINS-CURRENT> (275,621)
<APPREC-INCREASE-CURRENT> (1,356,026)
<NET-CHANGE-FROM-OPS> 3,291,097
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (536)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,567
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 50
<NET-CHANGE-IN-ASSETS> 67,423,841
<ACCUMULATED-NII-PRIOR> 96,559
<ACCUMULATED-GAINS-PRIOR> (1,769,137)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 473,616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 611,711
<AVERAGE-NET-ASSETS> 75,866,425
<PER-SHARE-NAV-BEGIN> 9.820
<PER-SHARE-NII> .050
<PER-SHARE-GAIN-APPREC> .004
<PER-SHARE-DIVIDEND> (.054)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.820
<EXPENSE-RATIO> .910
<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, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> FRANKLIN WASHINGTON MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 7,914,611
<INVESTMENTS-AT-VALUE> 7,913,889
<RECEIVABLES> 150,914
<ASSETS-OTHER> 92,526
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,157,329
<PAYABLE-FOR-SECURITIES> 427,644
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,723
<TOTAL-LIABILITIES> 439,367
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,806,247
<SHARES-COMMON-STOCK> 787,397
<SHARES-COMMON-PRIOR> 579,874
<ACCUMULATED-NII-CURRENT> 36,979
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (124,542)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (722)
<NET-ASSETS> 7,717,962
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 366,775
<OTHER-INCOME> 0
<EXPENSES-NET> (6,070)
<NET-INVESTMENT-INCOME> 360,705
<REALIZED-GAINS-CURRENT> (39,744)
<APPREC-INCREASE-CURRENT> (33,367)
<NET-CHANGE-FROM-OPS> 287,594
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (360,198)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 230,239
<NUMBER-OF-SHARES-REDEEMED> (49,709)
<SHARES-REINVESTED> 26,993
<NET-CHANGE-IN-ASSETS> 1,977,165
<ACCUMULATED-NII-PRIOR> 36,472
<ACCUMULATED-GAINS-PRIOR> (84,798)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 38,934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 56,869
<AVERAGE-NET-ASSETS> 6,211,603
<PER-SHARE-NAV-BEGIN> 9.900
<PER-SHARE-NII> 0.560
<PER-SHARE-GAIN-APPREC> (0.082)
<PER-SHARE-DIVIDEND> (0.578)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.800
<EXPENSE-RATIO> 0.100
<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, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 05
<NAME> FRANKLIN ARKANSAS MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 8,061,338
<INVESTMENTS-AT-VALUE> 8,102,474
<RECEIVABLES> 122,369
<ASSETS-OTHER> 331,001
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,555,844
<PAYABLE-FOR-SECURITIES> 377,105
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,192
<TOTAL-LIABILITIES> 390,297
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,126,683
<SHARES-COMMON-STOCK> 799,979
<SHARES-COMMON-PRIOR> 400,569
<ACCUMULATED-NII-CURRENT> 36,889
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (39,161)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,136
<NET-ASSETS> 8,165,547
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 346,464
<OTHER-INCOME> 0
<EXPENSES-NET> (5,988)
<NET-INVESTMENT-INCOME> 340,476
<REALIZED-GAINS-CURRENT> (2,503)
<APPREC-INCREASE-CURRENT> (96,898)
<NET-CHANGE-FROM-OPS> 241,075
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (335,368)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 405,209
<NUMBER-OF-SHARES-REDEEMED> (30,209)
<SHARES-REINVESTED> 24,410
<NET-CHANGE-IN-ASSETS> 4,031,806
<ACCUMULATED-NII-PRIOR> 31,781
<ACCUMULATED-GAINS-PRIOR> (36,658)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,533
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 62,156
<AVERAGE-NET-ASSETS> 5,985,615
<PER-SHARE-NAV-BEGIN> 10.320
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> (0.078)
<PER-SHARE-DIVIDEND> (0.582)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.210
<EXPENSE-RATIO> 0.100
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN MUNICIPAL SECURITIES TRUST NOVEMBER 30, 1995 SEMI ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<SERIES>
<NUMBER> 04
<NAME> FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 8,758,735
<INVESTMENTS-AT-VALUE> 9,198,164
<RECEIVABLES> 133,005
<ASSETS-OTHER> 191,445
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,522,614
<PAYABLE-FOR-SECURITIES> 393,990
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 19,098
<TOTAL-LIABILITIES> 413,088
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,624,355
<SHARES-COMMON-STOCK> 847,504
<SHARES-COMMON-PRIOR> 568,467
<ACCUMULATED-NII-CURRENT> 50,138
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,396)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 439,429
<NET-ASSETS> 9,109,526
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 229,223
<OTHER-INCOME> 0
<EXPENSES-NET> (9,968)
<NET-INVESTMENT-INCOME> 219,255
<REALIZED-GAINS-CURRENT> 347
<APPREC-INCREASE-CURRENT> 184,865
<NET-CHANGE-FROM-OPS> 404,467
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (211,237)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 284,231
<NUMBER-OF-SHARES-REDEEMED> (19,025)
<SHARES-REINVESTED> 13,831
<NET-CHANGE-IN-ASSETS> 3,123,548
<ACCUMULATED-NII-PRIOR> 42,120
<ACCUMULATED-GAINS-PRIOR> (4,743)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,968
<AVERAGE-NET-ASSETS> 7,528,502
<PER-SHARE-NAV-BEGIN> 10.530
<PER-SHARE-NII> .281
<PER-SHARE-GAIN-APPREC> .235
<PER-SHARE-DIVIDEND> (.296)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.750
<EXPENSE-RATIO> .260
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
