As filed with the Securities and Exchange Commission on February 28, 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. 8 (x)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10 (x)
FRANKLIN MUNICIPAL SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
{ } immediately upon filing pursuant to paragraph (b)
{ } on (Date) pursuant to paragraph (b)
{X} 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 27, 1995.
FRANKLIN MUNICIPAL SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin California High Yield Municipal Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights - How Has the
Information Fund Performed?"; "How Does the
Fund Measure Performance?"
4. General Description of "What is Franklin California High
Registrant Yield Municipal Fund?"; "How Does
the Fund Invest Its Assets?";
"General Information"
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 "What Distributions Might I Receive
Securities from the Fund?"; "How Taxation
Affects You and the Fund?";
"General Information"
7. Purchase of Securities "Who Manages the Fund?"; "How Do I
Being Offered Buy Shares?"; "How Are Fund Shares
Valued?"
8. Redemption or Repurchase "What If My Investment Outlook
Changes?"; "Exchange Privilege";
"How Do I Sell?"; "Telephone
Transactions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUNICIPAL SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
10. Cover Page "Cover Page"
11. Table of Contents "Contents"
12. General Information and "Miscellaneous
History Information"
13. Investment Objectives and "Each Fund's Investment Objectives
Policies and Policies"; "Description of
Municipal and Other Securities";
"Investment Restrictions",
14. Management of the "Officers and Trustees"
Registrant
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"
17. Brokerage Allocation and "How Do the Funds Purchase
Other Practices Securities for Their Portfolios?"
18. Capital Stock and Other "Miscellaneous
Securities Information"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities "Additional Information"; "How Are
Being Offered Fund Shares Valued?"; "Financial
Statements"
20. Tax Status "Additional Information Regarding
Taxation";
21. Underwriters "The Trust's Underwriter"
22. Calculation of Performance "General Information"
Data
Franklin
California High Yield
Municipal Fund
Franklin Municipal Securities Trust
PROSPECTUS October 1, 1995, as amended April [], 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin California High Yield Municipal Fund (the "Fund"), a separate
non-diversified series of Franklin Municipal Securities Trust( the "Trust"),
seeks to provide investors with a high current yield exempt from federal and
California personal income taxes by investing in lower-rated or unrated
municipal securities. As a secondary objective, the Fund will seek capital
appreciation to the extent that this is possible and is consistent with its
principal investment objective.
The Fund invests primarily in municipal securities issued by California and
its political subdivisions, agencies and instrumentalities which pay interest
exempt, in the opinion of counsel, from California state and regular federal
income taxes.
Although exempt from regular federal and state personal income tax, interest
paid on certain types of municipal obligations is deemed to be a preference
item under federal income tax law and subject to the federal alternative
minimum tax. It is possible that the Fund's investments could consist
entirely of bonds subject to the federal alternative minimum tax.
The Fund may invest up to 100% of its portfolio in non-investment grade bond,
commonly known as "junk bonds," which entail default and other risks greater
than those associated with higher rated securities. You should carefully
assess the risks associated with an investment in the Fund in light of the
securities in which the Fund invests. See "What Are the Fund's Potential
Risks? - High Yielding, Fixed-Income Securities."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After
reading the Prospectus, you should retain it for future reference; it
contains information about the purchase and sale of shares and other items
which you will find useful.
An SAI concerning the Fund, dated October 1, 1995, as amended May 1, 1996 and
as may be further amended from time to time, provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest
to you. It has been filed with the SEC and is incorporated herein by
reference. A copy is available without charge from the Fund or from
Distributors, at the address or telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative,
dealer, or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
The Fund offers two classes of shares: Franklin California High Yield
Municipal Fund - Class I ("Class I") and Franklin California High Yield
Municipal Fund - Class II ("Class II"). You can choose between Class I
shares, which generally bear a higher front-end sales charge and lower
ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and Class II
shares, which generally have a lower front-end sales charge and higher
ongoing Rule 12b-1 fees. You should consider the differences between the two
classes, including the impact of sales charges and Rule 12b-1 fees, in
choosing the more suitable class given your anticipated investment amount and
time horizon. See "How Do I Buy Shares? - Deciding Which Class to Buy."
Contents Page
Expense Table
Financial Highlights - How Has the Fund Performed?
What is Franklin California High Yield Municipal Fund?
How Does the Fund Invest Its Assets?
What Are the Fund's Potential Risks?
How You Participate in the Results of the Fund's Activities
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding Taxpayer IRS Certifications
Useful Terms and Definitions
Appendix - Description of Municipal
Securities Ratings
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. The figures for both classes are based on the
aggregate operating expenses of the Class I shares, before fee waivers and
expense reductions, for the fiscal year ended May 31, 1995.
Class I Class II
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) 4.25% 1.00%+
Deferred Sales Charge None++ 1.00%+++
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:
Reports to Shareholders 0.04% 0.04%
Professional Fees 0.04% 0.04%
Other 0.09% 0.09%
----- -----
Total Other Expenses 0.17% 0.17%
----- -----
Total Fund Operating Expenses 0.88%** 1.44%**
======== =======
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class
II shares than for Class I shares. Given the maximum front-end sales charge
and the rate of Rule 12b-1 fees of each class, it is estimated that this will
take less than six years if you maintain total shares valued at less than
$100,000 in the Franklin Templeton Funds. If your investments in the Franklin
Templeton Funds are valued at $100,000 or more, you will reach the crossover
point more quickly.
++Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred
sales charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*The Manager has agreed in advance to waive all of its management fee and to
make certain payments to reduce expenses of the Fund. With this reduction,
the Fund did not pay a management fee. Total operating expenses for the year
ended May 31, 1995, for Class I shares represented 0.20% of the average net
assets of the class.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.15%. See "Who Manages the Fund? - Plans of
Distribution." Consistent with National Association of Securities Dealers,
Inc.'s rules, it is possible that the combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charges permitted under
those same rules.
You should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an investment in the
Fund. Rather, the table has been provided only to assist you in gaining a
more complete understanding of fees, charges and expenses. For a more
detailed discussion of these matters, you should refer to the appropriate
sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the
expenses, including the maximum front-end sales charge and applicable
contingent deferred sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and
(2) redemption at the end of each time period.
One Year Three Years Five Years Ten Years
Class I $51* $69 $89 $146
Class II $34 $55 $88 $181
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would incur the following expenses on the same investment in Class II
shares, assuming no redemption.
One Year Three Years Five Years Ten Years
Class II $25 $55 $88 $181
This example is based on the aggregate annual operating expenses, before fee
waivers and expense reductions, shown above and should not be considered a
representation of past or future expenses, which may be more or less than
those shown. The operating expenses are borne by the Fund and only indirectly
by you as a result of your investment in the Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%,
but the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a Class I
share of the Fund from the effective date of the Fund's registration
statement, as indicated below, through the period ended November 30, 1995.
The information for each of the fiscal years in the period ended May 31, 1995
has been audited by Coopers & Lybrand L.L.P., independent auditors, whose
audit report appears in the financial statements in the Trust's Annual Report
to Shareholders for the fiscal year ended May 31, 1995. The remaining figures
are not audited. See the discussion "Reports to Shareholders" under "General
Information."
<TABLE>
<CAPTION>
Net Total Distri-Distributions
Net Asset Net Realized & From butions From Net Asset Net Assets Ratio of
Period Value Invest-Unrealized Invest- From Net Realized Total Value at End Expenses Net Income Portfolio
Ended Beginning ment Gain (Loss) ment Investment Capital Distri- at End Total of Period to Average to Average Turnover
May 31 of Period Income on SecuritiesOperations Income Gain bution of PeriodReturn+(in 000's) Net Assets Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19931 $10.00 $ .03 $(.060) $(.030) $-- $-- $-- $9.97 (3.60)%* $ 2,245 --% 3.85%* 8.89%
1994 9.97 .53 (.199) .331 (.558) (.013) (.571) 9.73 3.22 31,938 .07 6.14 40.74
1995 9.73 .66 .176 .836 (.636) -- (.636) 9.93 9.08 51,102 .20 6.89 57.06
19952 9.93 .328 .150 .478 (.328) -- (.328) 10.08 4.93 72,982 .35* 6.77* 7.62
</TABLE>
1For the period May 3, 1993 (effective date of registration) to May 31, 1993.
2For the six months ended November 30, 1995.
+Total return measures the change in value of an investment over the periods
indicated. It does not include the front-end sales sales charge and assumes
reinvestment of dividends and capital gains at net asset value.
*Annualized.
**During the period 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:
19931.............. 1.42%*
1994............... .87
1995............... .88
19952.............. .83*
About the Trust
The Fund is a nondiversified, open-end management investment company commonly
called a "mutual fund." The Trust was organized as a Delaware business trust
and registered with the SEC under the 1940 Act. The Fund has two classes of
shares of beneficial interest ("multiclass" structure) with a par value of
$.01: Franklin California High Yield Municipal Fund - Class I and Franklin
California High Yield Municipal Fund - Class II. All Fund shares outstanding
before April[] 1996 have been redesignated as Class I shares and will retain
their previous rights and privileges, except for legally required
modifications to shareholder voting procedures, as discussed in "General
Information - Organization and Voting Rights."
Investment Objectives
and Policies of the Fund
The Fund's principal and secondary investment objectives and other
fundamental policies may not be changed unless approved by the holders of a
majority of the outstanding shares of the Fund, as defined in the 1940 Act.
The Fund seeks to provide investors with a high current yield exempt from
federal and California state personal income taxes by investing in
lower-rated or unrated municipal securities. As a secondary objective, the
Fund will seek capital appreciation to the extent this is possible and is
consistent with its principal investment objective. Because of the Fund's
policy of seeking high current yield and its ability to invest in lower-grade
debt securities including defaulted securities, a higher degree of risk
accompanies an investment in the Fund's shares than is the case in a more
conservative tax-free, income-type investment company. There, of course, can
be no guarantee that the Fund's objectives will be achieved.
The Fund invests primarily in municipal securities issued by California and
its political subdivisions, agencies and instrumentalities, and in any
municipal obligations of non-state issuers which pay interest exempt from
regular federal and California personal income taxes. Under normal market
conditions, the Fund will invest at least 65% of its total assets in
municipal securities which pay interest exempt from California personal
income tax.
Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its net assets in
municipal securities, the interest on which is exempt from regular federal
income taxes. Although exempt from regular federal income tax, interest paid
on certain types of municipal obligations, such as "private activity bonds,"
and the dividends to be paid by the Fund therefrom, is deemed to be a
preference item under the federal alternative minimum tax system and
therefore subject to the federal alternative minimum tax. As a result,
dividends that would otherwise be tax-exempt may not be completely tax-exempt
to an investor who is subject to the federal alternative minimum tax, and,
therefore, an investment in the Fund may not be appropriate for such an
investor.
Thus, it is possible, although not anticipated, that up to 20% of the Fund's
net assets could be in obligations subject to regular federal taxation and/or
up to 35% of the Fund's total assets could be in municipal securities from
other states. In addition, it is possible that the Fund's investments could
consist entirely of bonds subject to the federal alternative minimum tax.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain "private activity bonds" (including those for
housing and student loans) issued after August 7, 1986, while still
tax-exempt, constitutes a preference item for taxpayers in determining the
federal alternative minimum tax under the Internal Revenue Code of 1986, as
amended (the "Code"), and under the income tax provisions of some states.
This interest could subject a shareholder to, or increase liability under,
the federal alternative minimum tax, depending on the shareholder's tax
situation. In addition, all distributions derived from interest exempt from
regular federal income tax may subject a corporate shareholder to, or
increase liability under, the federal alternative minimum tax because such
distributions are included in the corporation's "adjusted current earnings."
In states with a corporate franchise tax, distributions of the Fund may also
be fully taxable to a corporate shareholder under the state franchise tax
system.
Consistent with the Fund's investment objectives, the Fund may acquire such
private activity bonds if, in the Manager's opinion, such bonds represent the
most attractive investment opportunity then available to the Fund. As of May
31, 1995, the Fund had derived 7.62% of its income from bonds, the interest
on which constitutes a preference item subject to the federal alternative
minimum tax for certain investors.
In the event the rating on an issue held in the Fund's portfolio is changed
by a nationally recognized statistical rating organization ("NRSRO"), such
event will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security. A description of the ratings is contained in
Appendix B of this Prospectus.
For temporary defensive purposes only, when the Manager believes that market
conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of portfolio value, the Fund may invest (i) more than
20% of its assets (which could be up to 100%) in fixed-income obligations the
interest on which is subject to regular federal income tax and (ii) more than
35% of the value of its total assets (which could be up to 100%) in
instruments the interest on which is exempt from regular federal income taxes
but not California personal income tax. Any such temporary taxable
investments will be limited to obligations issued or guaranteed by the full
faith and credit of the U.S. government, commercial paper rated P-1 by
Moody's, A-1 by S&P, or F-1+ by Fitch, or obligations of domestic banks with
assets of $1 billion or more.
The Fund may borrow from banks for temporary or emergency purposes up to 5%
of its total assets and pledge up to 5% of its total assets in connection
therewith. Consistent with procedures approved by the Board of Trustees, the
Fund may also lend its portfolio securities to qualified securities dealers
or other institutional investors, provided that such loans do not exceed 10%
of the value of the Fund's total assets at the time of the most recent loan.
The Fund currently intends to limit its lending of securities to no more than
5% of its total assets.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means
obligations issued by or on behalf of California, obligations of non-state
issuers, such as the territories and possessions of the U.S., any state, or
the District of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from regular federal
income tax. A portion or all of the interest on such securities may be deemed
to be preference items under the federal alternative minimum tax system and
thus subject to the federal alternative minimum tax. An opinion as to the
tax-exempt status of a municipal security generally is rendered to the issuer
by the issuer's counsel at the time of issuance of the security.
Municipal securities are used to raise money for various public purposes such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to provide funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
The Fund has no restrictions on the maturities of municipal securities in
which the Fund may invest. The Manager will consider the Fund's investment
objective and current market conditions in determining which securities to
buy or hold.
It is possible that the Fund from time to time will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political, or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal
securities of longer maturities produce higher current yields than municipal
securities with shorter maturities but are subject to greater price
fluctuation due to changes in interest rates, tax laws and other general
market factors. Lower-rated municipal securities generally produce a higher
yield than higher-rated municipal securities due to the perception of a
greater degree of risk as to the ability of the issuer to make timely payment
of principal and interest on its obligations.
The Fund may invest in variable or floating rate demand notes ("VRDNs").
VRDNs are tax-exempt obligations which bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates, and which carry a demand feature that permits the Fund to tender the
obligation back to the issuer or a third party at par value plus accrued
interest prior to maturity, according to the terms of the obligation, which
amount may be more or less than the amount the Fund paid for such obligation.
Frequently, VRDNs are secured by letters of credit or other credit support
arrangements. Because of the demand feature, the prices of VRDNs may be
higher and the yields lower than they otherwise would be for obligations
without a demand feature. The Fund will limit its purchase of municipal
securities that are floating rate and variable rate obligations to those
meeting the quality standards set forth in this Prospectus.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market
fluctuation and the value at delivery may be more or less than the purchase
price. Although the Fund will generally purchase municipal securities on a
when-issued basis with the intention of acquiring such securities, it may
sell such securities before the settlement date if it is deemed advisable.
When the Fund is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian, cash or high-grade marketable
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so for the purpose
of acquiring securities for the Fund's portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage.
The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state
and local governments to finance the purchase of property, function much like
installment purchase agreements. For example, COPs may be created when
long-term lease revenue bonds are issued by a governmental corporation to pay
for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used
to repay interest and principal on the bonds issued to purchase the property.
Once these lease payments are completed, the municipality gains ownership of
the property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.
A feature which distinguishes COPs from municipal debt is that the lease
which is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local
administrations, being faced with increasingly tight budgets, therefore have
more discretion to curtail payments under COPs than they do to curtail
payments on traditionally funded debt obligations. If the government lessee
does not appropriate sufficient monies to make lease payments, the lessor or
its agent is typically entitled to repossess the property. The private sector
value of the property may be more or less than the amount the government
lessee was paying.
The Board reviews the COPs held in the Fund's portfolio to assure that they
constitute liquid investments based on various factors reviewed by the
Manager and monitored by the Board. Such factors include (a) the credit
quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of comparable quality to the rating required for the Fund's
investment, including an assessment of the likelihood that the leases will
not be canceled; (b) the size of the municipal securities market, both in
general and with respect to COPs; and (c) the extent to which the type of
COPs held by the Fund trade on the same basis and with the same degree of
dealer participation as other municipal bonds of comparable credit rating or
quality. While there is no limit as to the amount of assets which the Fund
may invest in COPs, as of May 31, 1995, the Fund held 18.50% of its total net
assets in COPS and other municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time during which the bonds may not be
called) which usually lasts for 5 to 10 years, after which time such bonds
may be called away. An issuer may generally be expected to call its bonds, or
a portion of them, during periods of declining interest rates, when
borrowings may be replaced at lower rates than those obtained in prior years.
If the purchase price of such bonds included a premium related to the
appreciated value of the bonds, some or all of that premium may not be
recovered by bondholders, such as the Fund, depending on the price at which
such bonds were redeemed.
What are the Fund's Potential Risks?
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce such risk. There are
two categories of risks to which the Fund is subject: credit risk and market
risk. Credit risk is a function of the ability of an issuer of a municipal
security to maintain timely interest payments and to pay the principal of a
security upon maturity. It is generally reflected in a security's underlying
credit rating and its stated interest rate (normally the coupon rate). A
change in the credit risk associated with a municipal security may cause a
corresponding change in the security's price.
Market risk is the risk of price fluctuation of a municipal security caused
by changes in general economic and interest rate conditions generally
affecting the market as a whole. A municipal security's maturity length also
affects its price. As with other debt instruments, the price of the debt
securities in which the Fund invests are likely to decrease in times of
rising interest rates. Conversely, when rates fall, the value of the Fund's
debt investments may rise. Price changes of debt securities held by the Fund
have a direct impact on the net asset value per share of the Fund securities,
and there are certain specific factors and considerations concerning
California which may affect the credit and market risk of the these municipal
securities. Please see Risk Factors in California" below and in "Appendix B"
in the SAI.
As a non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested by the Fund at any time in the
securities of any one issuer. However, the Fund intends to comply with the
asset diversification, income, distribution and other requirements of the
Code applicable to "regulated investment companies" so that it will not be
subject to federal income tax and distributions to shareholders will be free
from regular federal income tax to the extent that they are derived from
municipal securities. Accordingly, the Fund will not purchase a security if,
as a result, more than 25% of its total assets would be invested in the
securities of a single issuer, or with respect to 50% of its total assets,
more than 5% of such assets would be invested in the securities of a single
issuer. To the extent the Fund is not fully diversified under the 1940 Act,
it may be more susceptible to adverse economic, political or regulatory
developments affecting a single issuer than would be the case if the Fund
were more broadly diversified.
The Fund seeks to provide California investors with a high current yield
exempt from federal and California personal income taxes by investing
primarily in lower-rated or unrated municipal securities. Higher yields are
ordinarily available from securities in the lower-rated categories of the
NRSRO. These ratings are Ba, B, Caa and Ca, by Moody's Investors Service
("Moody's"), BB, B, CCC and CC by Standard & Poor's Corporation ("S&P") or
BB, B, CCC and CC by Fitch Investors Service, Inc. ("Fitch.") The Fund may
also invest in securities which are not rated, provided that, in the opinion
of the Manager, the securities are comparable in quality to those rated by an
NRSRO. These ratings represent the opinions of the NRSROs with respect to the
generally higher risk associated with the issuer's ability to pay interest
and repay principal. They do not purport to reflect the risk of fluctuations
in market value and are not absolute standards of quality but will be
considered in connection with the investment of the Fund's assets.Securities
in these ratings categories are regarded, on balance, as predominantly
speculative with respect to the capacity to pay interest and repay principal
in accordance with the terms of the obligation. The Fund may invest in
municipal securities regardless of their rating, including, from time to
time, defaulted debt securities if, in the opinion of the Manager, the issuer
may resume interest payments or other advantageous developments appear
likely, in the near term. The Fund will not invest more than 5% of its total
assets (at the time of purchase) in defaulted securities. A purchase of a
security which is in default carries a high degree of risk and may have the
consequence that interest payments with respect to such security may be
reduced, deferred, suspended, or canceled, causing the loss of the entire
amount of the investment. See also the disclosure under "Risk Factors
Relating to High Yielding, Fixed-Income Securities"below. While it is
expected that the portfolio of the Fund will normally consist of lower-rated,
higher yielding bonds, there may be instances when the portfolio will contain
medium grade (BBB or Baa rated), lower yielding bonds because adequate
quantities of attractive lower-rated bonds are not available at that time. In
addition, there may be times when, due to unusual market conditions, or when
the difference in yields on higher and lower-rated bonds is narrowed to the
extent that higher risk is not justified by higher return, that the Fund may
acquire higher-rated bonds for its portfolio. It is expected that the Fund's
portfolio will generally consist of longer-term municipal securities as these
normally return higher yields than short-term issues.
Risk Factors in California
The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon
information derived from public documents relating to securities offerings of
California state and municipal issuers, from independent municipal credit
reports and historically reliable sources, but has not been independently
verified by the Fund.
California constitutional and other laws affect the ability of California
state and municipal issuers to obtain sufficient revenue to pay their bond
obligations. In 1978, California voters approved an amendment to the
California Constitution known as Proposition 13. Proposition 13 limits ad
valorem taxes on real property and restricts the ability of taxing entities
to increase real property taxes. Legislation passed subsequent to Proposition
13, however, provided for the redistribution of California's General Fund
surplus to local agencies, the reallocation of revenues to local agencies and
the assumption of certain local obligations by the state so as to help
California municipal issuers to raise revenue to pay their bond obligations.
It is unknown, however, whether additional revenue redistribution legislation
will be enacted in the future and whether, if enacted, such legislation would
provide sufficient revenue for such California issuers to pay their
obligations. The state is also subject to another constitutional amendment,
Article XIIIB, which may have an adverse impact on California state and
municipal issuers. Article XIIIB restricts the state from spending certain
appropriations in excess of an appropriations limit imposed for each state
and local government entity. If revenues exceed such appropriations limit,
such revenues must be returned either as revisions in the tax rates or fee
schedules.
The past four years have challenged California's resiliency, as cyclical and
structural problems have been addressed. The national recession severely
affected California and its effects have lingered. The magnitude of
California's military-industrial complex and effects of the recession has
resulted in a loss of more than 700,000 jobs. Of the approximate 700,000 jobs
lost, it is estimated that more than 240,000 have been restored. Base
closures have likewise impacted state and local economies. California's
social welfare and entitlement programs have strained finances as caseload
growth has exceeded resource availability. The high priority of public safety
has resulted in the enactment of strong crime legislation that is both
capital and labor intensive. California has also been affected by natural
catastrophes including earthquakes, wildfires, floods and droughts.
By the fall of 1993, it had become apparent the California economy had
reached a trough and recovery was underway. During 1994 the state's economy
paralleled the broad-based expansion occurring on the national level.
California's economy continued to gain momentum through 1994 as revenue
collections exceeded budget projections. The state's unemployment rate opened
at 10.1 percent in 1994 and declined to 7.7 percent at calendar year-end.
California's unemployment rate rose slightly in January 1995 to 8.2 percent,
perhaps reflecting the effect of seven interest rate increases over the past
year. The number of jobless in January 1995 was approximately 1.3 million,
reflecting a decrease of 300,000 from the prior year.
In early July 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California from A+ to A and Aa to A1, respectively.
These revisions reflected the state's heavy reliance on the short-term note
market to finance its cash imbalance and the likelihood that this exposure
will persist for at least another two years. For more information on these
ratings revisions and the state's current budget, please refer to the Fund's
SAI.
On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Orange County Funds") filed for protection
under Chapter 9 of the federal Bankruptcy Code after reports that the Orange
County Funds had suffered significant market losses in their investments,
causing a liquidity crisis for the Orange County Funds and the County. More
than 180 other public entities, most of which, but not all, are located in
the County, were also depositors in the Orange County Funds. As of
mid-January, 1995, following a restructuring of most of the Orange County
Funds' assets to increase their liquidity and reduce their exposure to
interest rate increases, the County estimated the Orange County Funds' loss
at about $1.69 billion, or 22% of their initial deposits of approximately
$7.5 billion. Following the bankruptcy filing many of the entities which
deposited money in the Orange County Funds, including the County, faced cash
flow difficulties because of the bankruptcy filing and would have been
required to reduce programs or capital projects. On May 2, 1995, the
bankruptcy court approved a settlement between the County and the Pool
Participants which provides for Pool Participants to receive 100% of their
investment balances. The settlement provides an initial cash distribution of
77% if their aggregate investment balance followed by a combination of
recovery notes and other claims. The initial 77% distribution was released on
May 19, 1995, which greatly reduces the cash flow difficulties faced by
depositors. As of May 31, 1995, the Fund did not own any direct Orange County
obligations.
The state has no existing obligation with respect to any outstanding
obligations or securities of the County or any of the other participating
entities. However, in the event the County is unable to maintain county
administered state programs because of insufficient resources, it may be
necessary for the state to intervene, but the State cannot presently predict
what, if any, action may occur. At this time, it appears that school
districts may have collectively lost up to $230 million from the amounts they
had on deposit in the Orange County Fund. Under existing legal precedent, the
state is obligated to intervene when a school district's fiscal problems
would otherwise deny its students basic educational quality. The state is not
presently able to predict whether any school districts will face insolvency
because of their participation in the Funds, and if so, the potential amount
or form of aid which the state may have to provide. The Governor has called a
special session of the Legislature which is expected to consider various
responses to the Orange County situation.
Risk Factors Relating to High Yielding,
Fixed-Income Securities
The portfolio of the Fund is subject to greater risks due to its ability to
invest in municipal securities rated below investment grade by the NRSROs, or
which are unrated by an NRSRO but deemed by the Manager to be of comparable
quality. The market values of these securities, commonly known as junk bonds,
tend to reflect individual developments affecting the issuer to a greater
extent than do higher-rated securities, which react primarily to fluctuations
in the general level of interest rates. Such lower-rated securities also tend
to be more sensitive to economic conditions than higher-rated securities.
These lower-rated fixed-income securities are considered by the NRSROs, on
balance, to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation and will generally involve more credit risk than securities in
the higher rating categories. Even securities rated triple b by S&P, Moody's
or Fitch, ratings which are considered investment grade, possess some
speculative characteristics.
Projects which are financed by the issuance of high yielding, fixed-income
securities are often highly leveraged and may not have more traditional
methods of financing available to them. Therefore, the risk associated with
acquiring the securities of such issuers is generally greater than is the
case with higher-rated securities. For example, during an economic downturn
or a sustained period of rising interest rates, projects financed by high
yielding securities may experience financial stress. During such periods,
such projects may not have sufficient cash flow to meet their interest
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific developments, or the issuer's
inability to meet specific projected revenue forecasts, or by the
unavailability of additional financing.
To the extent the secondary trading market for a particular high yielding,
fixed-income security does exist, it is generally not as liquid as the
secondary market for higher-rated securities. Reduced liquidity in the
secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for
the Fund to obtain market quotations based on actual trades for purposes of
valuing the Fund's portfolio. Current value for these high yield issues are
obtained from pricing services and/or a limited number of dealers and may be
based upon factors other than actual sales. (See "How Are Fund Shares
Valued?")
Factors adversely impacting the market value of high yielding securities may
adversely impact the Fund's net asset value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
The Fund will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the Manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Current prices for defaulted bonds are generally significantly lower than
their purchase price, and if the Fund later has defaulted bonds, the Fund may
have unrealized losses on such defaulted securities which are reflected in
the price of the Fund's shares. In general, securities which default lose
much of their value in the time period prior to the actual default so that
the Fund's net assets are impacted prior to the default. The high yield
securities market is relatively new and much of its growth prior to 1990
paralleled a long economic expansion. The 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. The
Fund may retain an issue which has defaulted because such issue may present
an opportunity for subsequent price recovery. As previously noted, the Fund
may also, consistent with its investment objectives and policies purchase
debt obligations of issuers not currently paying interest as well as issuers
that are in default. Issues that are in default carry a high degree of risk
and may have the consequence that interest payments with respect to such
securities may be reduced, deferred, suspended, eliminated or never begin,
and may have the further consequences that principal payments may likewise be
reduced, suspended or canceled, causing the loss of the entire amount of the
investment.
The Fund's investment in lower-rated, unrated, and zero coupon municipal
securities may cause this Fund to recognize income and make distributions to
shareholders prior to the receipt of cash payments by the Fund. For example,
with respect to any non-performing obligations, this Fund may be required to
accrue as income the original amount of interest due on its obligations even
though such interest is not received by the Fund. In order to generate cash
to satisfy the Fund's distribution requirements, it may be required to
dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of Fund shares.
The SAI contains more information about zero coupon bonds.
Asset Composition Table
A credit rating by an NRSRO evaluates only the safety of principal and
interest of the bond, and does not specifically consider the market value
risk associated with an investment in such a bond. The table below shows the
percentage invested in each of the specific S&P rating categories and those
that are not rated but deemed by the Manager to be of the same credit
quality. The information was prepared based on a dollar weighted average of
the Fund's portfolio based on month-end assets for each of the 12 months in
the fiscal year ended May 31, 1995. The Appendix to this Prospectus includes
a description of each rating category.
Average Weighted
S&P Rating Percentage of Assets
---------- --------------------
AAA 1.54%
AA 4.29
A 28.25
A* 1.41
BBB 19.66
BBB* 21.50
BB* 23.35
*Not rated by the NRSROs. Indicates an internal rating by the Manager.
How Shareholders Participate
in the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the
securities owned by the Fund increase in value, the value of the shares of
the Fund which the shareholder owns will increase. If the securities owned by
the Fund decrease in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change in the value of
the securities owned by the Fund.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which
frequently accompany higher inflation and/or a growing economy are likely to
have a negative effect on the value of Fund shares. History reflects both
increases and decreases in the prevailing rate of interest and these may
reoccur unpredictably in the future.
Who Manages the Fund?
The Board has the primary responsibility for the overall management of the
Trust and for electing the officers of the Trust who are responsible for
administering the Fund's day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the
Board does not expect to encounter material conflicts in the future, the
Board will continue to monitor the Fund and will take appropriate action to
resolve such conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention
to offer only two classes of shares, but new classes may be offered in the
future.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who
own approximately 20% and 16%, respectively, of Resources' outstanding
shares. Resources is engaged in various aspects of the financial services
industry through its subsidiaries. Advisers acts as investment manager or
administrator to 36 U.S. registered investment companies (118 separate
series) with aggregate assets of over $80 billion, $41 billion of which is in
the municipal securities market.
The team responsible for the day-to-day management of the Fund's portfolio
is: Thomas Kenny since 1994, Bernie Schroer since 1987 and Sheila Amoroso
since 1994.
Thomas Kenny
Senior Vice President
of Advisers
Mr. Kenny is Director of Franklin's Municipal Bond Department. 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. Mr. Kenny joined Franklin in 1986. He is a member of
several municipal securities industry-related committees and associations.
Bernie Schroer
Vice President
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.
Sheila Amoroso
Portfolio Manager
of Advisers
Ms. Amoroso joined Franklin in 1986. She holds a Bachelor of Science degree
from San Francisco State University and is a member of municipal securities
industry-related committees and associations.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those
taken by the Manager on behalf of other funds. Neither the Manager (including
its affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the
Fund's Code of Ethics.
During the fiscal year ended May 31, 1995, and the six-month period ended
November 30, 1995, management fees, before any advance waiver, totaled .62%
and .62% (annualized), respectively, of the average monthly net assets of the
Fund. Total operating expenses, including management fees before any advance
waiver, totaled .88% and .83% (annualized), respectively, of the average
monthly net assets of the Fund. Pursuant to an agreement by Advisers to waive
its fees, the Fund did not pay a management fee for the fiscal year ended May
31, 1995 and paid an annualized fees totaling .15% of the average monthly net
assets of the Fund for the six months ended November 30, 1995. Operating
expenses totaled .20% and .35% (annualized) for the respective periods. This
arrangement may be terminated by the Manager at any time upon notice to the
Board.
It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because municipal securities are generally traded in
principal transactions that involve the receipt by the broker of a spread
between the bid and ask prices for the securities and not the receipt of
commissions. In the event that the Fund does participate in transactions
involving brokerage commissions, it is the Manager's responsibility to select
brokers through whom such transactions will be effected. The Manager would
try to obtain the best execution on all such transactions. If it is felt that
more than one broker would be able to provide the best execution, the Manager
will consider the furnishing of quotations and of other market services,
research, statistical and other data for the Manager and its affiliates, as
well as the sale of shares of the Fund, as factors in selecting a broker.
Further information is included under "How Does the Fund Purchase Securities
For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors or others
under the Class I Plan for such distribution expenses is .15% per annum of
Class I's average daily net assets, payable on a quarterly basis. All
expenses of distribution in excess of 0.15% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from
the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and
related expenses up to 0.50% per annum of Class II's daily net assets,
payable quarterly. Such fees may be used in order to compensate Distributors
or others for providing distribution and related services and bearing certain
expenses of the class. All expenses of distribution, marketing and related
services over that amount will be borne by Distributors or others who have
incurred them, without reimbursement by the Fund. In addition, the Class II
Plan provides for an additional payment by the Fund of up to .15% per annum
of Class II's average daily net assets as a servicing fee, payable
quarterly. This fee will be used to pay securities dealers or others for,
among other things, assisting in establishing and maintaining customer
accounts and records; assisting with purchase and redemption requests;
receiving and answering correspondence; monitoring dividend payments from the
Fund on behalf of customers, or similar activities related to furnishing
personal services and/or maintaining shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources,
a commission of up to 1% of the purchase price of Class II shares to
securities dealers who initiate and are responsible for such purchases.
During the first year following such purchases, Distributors will retain a
portion of Class II's Rule 12b-1 fees attributable to such shares equal to
.50% per annum of Class II's average daily net assets to partially recoup
fees Distributors pays to securities dealers in connection with initial
purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plans are included in the
maximum operating expenses which may be borne by each class of the Fund. For
more information, please see "The Fund's Underwriter" in the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income 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 carryovers) may
generally be made once a year in December to reflect any net short-term and
net long-term capital gains realized by the Fund as of October 31 of the
current fiscal year and any undistributed 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.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will
be calculated and distributed in the same manner for Class I and Class II
shares. The per share amount of any income dividends will generally differ
only to the extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board without prior notice to or approval
by shareholders, the Fund's current policy is to declare income dividends
daily and pay them monthly on or about the last business day of that month.
Daily allocation of net investment income will begin on the day after the
Fund receives your money or settlement of a wire order trade and will
continue to accrue through the day of receipt of your redemption request or
the settlement of a wire order trade.
The amount of income dividend payments by the Fund is dependent upon the
amount of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. The Fund does not
pay "interest" or guarantee any fixed rate of return on an investment in its
shares.
Distribution Options
You may choose to receive your distributions from the Fund in any of these
ways:
1. Purchase additional shares of the Fund - You may purchase 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 are a
Class II shareholder, 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. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin
Templeton Fund (without a sales charge or imposition of a contingent deferred
sales charge). If you are a Class II shareholder, you may also direct your
distributions to purchase 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 choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you
choose to send the money to a checking account, please see "Electronic Fund
Transfers" under "What Programs and Privileges Are Available to Me as a
Shareholder?"
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 no option is selected, dividend
and capital gain distributions will be automatically reinvested in the same
class of the Fund. You may change the distribution option selected at any
time by notifying the Fund by mail or by telephone. Please allow at least
seven days prior to the reinvestment date for the Fund to process the new
option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax
matters relating to the Fund and its shareholders, see "Additional
Information Regarding Taxation" in the SAI.
The Fund 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.
To the extent that dividends paid by the Fund are derived from interest
income from debt obligations of California or its political subdivisions or
from interest on U.S. territorial obligations (including Puerto Rico, the
U.S. Virgin Islands or Guam) which are exempt from regular federal and
California personal income tax, they will not be subject to either federal or
California personal income tax when received by 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
such exempt obligations at the end of each quarter of its fiscal year. In
addition, to the extent that dividends are derived from direct obligations of
the federal government, they will also be exempt from California personal
income taxes. However, if you are a corporate taxpayer subject to the
California franchise tax, all distributions will be fully taxable.
To the extent dividends paid by the Fund are derived from taxable income from
temporary investments (including the discount from certain stripped
obligations or their coupons or income from securities loans or other taxable
transactions), from the excess of net short-term capital gain over net
long-term capital loss, or from ordinary income derived from the sale or
disposition of bonds purchased with market discount after April 30, 1993 they
are treated as ordinary income whether you have elected to receive them in
cash or in additional shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount and such market discount
exceeds a de minimus amount under the Code. For such obligations purchased
after April 30, 1993, a portion of the gain on sale or disposition (not to
exceed the accrued portion of market discount as of the time of sale or
disposition) is treated as ordinary income rather than capital gain. Any
distribution by the Fund of such ordinary income to its shareholders will be
subject to regular federal and state income taxes in 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 an 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 advisors with respect to the applicability of other state
and local income taxes to their shares in the Fund and to distributions and
redemption proceeds received from the Fund. 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.
How Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. 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 fail to specify
a class, your purchase will automatically be invested in Class I shares.
Deciding Which Class to Buy
When deciding which class of shares to buy, you should consider a number of
factors, including the amount you expect to invest and the length of time you
expect to hold your investment. If you plan to invest $1 million or more in a
single payment or you qualify to buy Class I shares at net asset value, you
may not buy Class II shares.
Generally, you should consider buying Class I shares if:
you expect to invest in the Fund over the long term;
you qualify to buy Class I shares at a reduced sales charge; or
you intend to purchase $1 million or more over time.
You should consider Class II shares if:
you expect to invest less than $100,000 in Franklin Templeton Funds; and
you intend to make substantial redemptions within approximately six years
or less of investment.
Class I shares are generally more attractive for long-term investors because
of Class II's higher Rule 12b-1 fees, which 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 Rights of Accumulation programs, but intend 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 will therefore be automatically invested in
Class I shares. You may accumulate more than $1 million in Class II shares
through purchases over time, but if you intend 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
You may buy shares at the public offering price of the class you wish to
purchase, unless you qualify to purchase shares at a discount or without a
sales charge as discussed below. The front-end sales charge for Class II
shares is 1% and, unlike Class I shares, does not vary based upon the size of
your purchase.
Total Sales Charge
As a Percentage of
Amount Allowed to
Dealer as a
Size of Transaction Net Amount Percentage of
at Offering Price Offering Price Invested Offering Price*
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.15% 2.20% 2.00%
$1,000,000
$1,000,000 or more None** None None***
CLASS II
Under $1,000,000+ 1.00%** 1.01% 1.00%
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times
reallow the entire sales charge to the securities dealer. A securities dealer
who receives 90% or more of the sales commission may be deemed an underwriter
under the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class
I shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places
using standard rounding criteria.
Quantity Discounts in Sales Charges - Class I Shares Only
As shown in the table above, the sales charge you pay when you buy Class I
shares may be reduced based upon the size of your purchase.
Rights of Accumulation. To determine if you may pay a reduced sales charge,
you may add the cost or current value, whichever is higher, of your Class I
and Class II shares in other Franklin Templeton Funds, as well as those of
your spouse, children under the age of 21 and grandchildren under the age of
21, to the amount of your current Class I purchase. To receive the reduction,
you or your investment representative must notify Distributors that your
investment qualifies for a discount.
Letter of Intent. You may purchase 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. You or your investment representative must
inform us that the Letter is in effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application,
you acknowledge and agree to the following:
You authorize Distributors to reserve five percent (5%) of the amount of
the total intended purchase in Class I shares registered in your name.
You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem
any or all of these reserved shares to pay any unpaid sales charge if you
do not fulfill the terms of the Letter.
We will include the reserved shares in the total shares you own as
reflected on your periodic statements.
You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
Although you may exchange your shares, you may not liquidate reserved
shares until you complete the Letter or pay the higher sales charge.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase
Class I shares at the reduced sales charge applicable 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. For
example, if group members previously invested and still hold $80,000 of Fund
shares and invest $25,000, the sales charge will be 3.5%
We define a qualified group as one which (i) has been in existence for more
than six months, (ii) has a purpose other than acquiring Fund shares at a
discount and (iii) satisfies uniform criteria which enable Distributors to
realize economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be
available to arrange for meetings between our representatives and group
members. It must also agree to include sales and other materials related to
the Franklin Templeton Funds in publications and mailings to its members at
reduced or no cost to Distributors, and arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue
further investments. Due to the varying procedures used by employers to
handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time the money reaches the Fund. We invest your
purchase at the applicable offering price per share determined on the day
that the Fund receives both the check and the payroll deduction data in
required form.
Purchases at Net Asset Value
You may invest money from the following sources in Class I shares of the Fund
without paying front-end or contingent deferred sales charges. You may also
purchase Class II shares without paying front-end or contingent deferred
sales charges if the source of your investment proceeds is included in
paragraph (i) below:
(i) a distribution that you have received from a Franklin Templeton Fund or
a real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its
payment date. You may reinvest Class II distributions in either Class I or
Class II shares, but Class I distributions may only be invested in Class I
shares under this privilege. For more information, see "Distribution Options"
under "What Distributions Might I Receive from the Fund?" or call Shareholder
Services at 1-800/632-2301; or
(ii) a redemption from a mutual fund with investment objectives similar to
those of the Fund, if (a) your investment in that fund was subject to either
a front-end or contingent deferred sales charge at the time of purchase, (b)
the fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds in Class I or Class II shares of the Fund at net asset value.
To do so, you must (a) have paid a sales charge on the purchase or sale of
the original shares, (b) reinvest the redemption money in the same class of
shares, and (c) request the reinvestment of the money within 365 days of the
redemption date. You may reinvest up to the total amount of the redemption
proceeds under this privilege. If a different class of shares is purchased,
the full front-end sales charge must be paid at the time of purchase of the
new shares. While you will receive credit for any contingent deferred sales
charge paid on the shares redeemed, a new contingency period will begin.
Shares that were no longer subject to a contingent deferred sales charge will
be reinvested at net asset value and will not be subject to a new contingent
deferred sales charge. Shares exchanged into other Franklin Templeton Funds
are not considered "redeemed" for this privilege (see "What If My Investment
Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into
the Franklin Templeton Funds as described above, you will have 365 days from
the date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your
money in the Fund at net asset value for you, that person or institution may
charge you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales
charge may affect the amount of gain or loss you recognize and the tax basis
of the shares reinvested. If you have a loss on the redemption, the loss may
be disallowed if you reinvest in the same fund within a 30-day period. If you
would like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of
the Fund at net asset value regardless of the source of the investment
proceeds. If you or your account is included in one of the categories below,
none of the Class I shares you purchase will be subject to front-end or
contingent deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their
investment accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of
the employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) any state, county, or city, or any instrumentality, department,
authority or agency thereof which has determined that the Fund is a legally
permissible investment and which is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the purchase of
shares of any registered management investment company ("an eligible
governmental authority"). IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR
OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE
FUND CONSTITUTE LEGAL INVESTMENTS. Municipal investors considering investment
of proceeds of bond offerings into the Fund should consult with expert
counsel to determine the effect, if any, of various payments made by the Fund
or the Manager on arbitrage rebate calculations. If you are a securities
dealer who has executed a dealer agreement with Distributors and, through
your services, an eligible governmental authority invests in the Fund at net
asset value, Distributors or one of its affiliates may make a payment, out of
its own resources, to you in an amount not to exceed 0.25% of the amount
invested. Please contact the Franklin Templeton Institutional Services
Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family
members. Although you may pay sales charges on investments in accounts opened
after your association with us has ended, you may continue to invest in
accounts opened while you were with us without paying sales charges; or
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1
million in Franklin Templeton Funds over a 13 month period. We will accept
orders for such 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 such order.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this
written statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell
Shares?" in the SAI.
General
The Fund continuously offers its shares through securities dealers who have
an agreement with Distributors. The Fund and Distributors may refuse any
order for the purchase of shares. Currently, the Fund does not allow
investments by Market Timers.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund
may be required to register as securities dealers pursuant to state law.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in
paragraph (ix) under "Purchases at Net Asset Value" above. Please see "How Do
I Buy and Sell Shares?" in the SAI for the breakpoints applicable to these
purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price.
To partially recoup these payments, Distributors will keep part of the Rule
12b-1 fees assessed to the shares during the first year following their
purchase.
Either Distributors or one of its affiliates, out of its own resources, may
also provide additional compensation to securities dealers in connection with
the sale of shares of the Franklin Templeton Funds. In some cases, this
compensation may be available only to securities dealers whose
representatives have sold or are expected to sell significant amounts of
shares of the Franklin Templeton Funds. Compensation may include financial
assistance and payments made in connection with conferences, sales or
training programs for employees of the securities dealer, seminars for the
public, advertising, sales campaigns and/or shareholder services, programs
regarding one or more of the Franklin Templeton Funds and other programs or
events sponsored by securities dealers, and payment for travel expenses of
invited registered representatives and their families, including lodging, in
connection with business meetings or seminars located within or outside the
U.S. 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 National Association of Securities Dealers, Inc. None of
this compensation is paid for by the Fund or its shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers
and Trustees.
What Programs and Privileges
Are Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account
through the National Securities Clearing Corporation ("NSCC") (see
"Registering Your Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments,
including the reinvestment of dividends and capital gain distributions, are
generally credited to an account in the name of an investor on the books of
the Fund, without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate
cannot be replaced without obtaining a sufficient indemnity bond. The cost of
such a bond, which is generally borne by you, can be 2% or more of the value
of the lost, stolen or destroyed certificate. A certificate will be issued if
requested by you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the
dividends reinvested during the period and after each other transaction which
affects your account. This statement will also show the total number of
shares you own, including the number of shares in "plan balance" for your
account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to 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 at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, 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
terminate the program at any time by notifying Investor Services by mail or
by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from
your account on a monthly, quarterly, semiannual or annual basis. To
establish a Systematic Withdrawal Plan, the value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. Please keep in mind that $50 is merely the minimum amount and is
not a recommended amount.
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 receive your payments in any of the following
ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in
cash. You may 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.
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. You will generally receive your payments within three
to five days after the shares are redeemed.
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.
Redemptions under a Systematic Withdrawal Plan are considered a sale for
federal income tax purposes. 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.
While a Systematic Withdrawal Plan is in effect, shares must be held either
in plan balance or, where share certificates are outstanding, deposited with
the Fund. You should ordinarily not make additional investments in the Fund
of less than $5,000 or three times the amount of annual withdrawals under the
plan because of the sales charge on additional purchases. Shares redeemed
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 terminate a Systematic Withdrawal Plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying Investor
Services in writing at least seven business days prior to the end of the
month preceding a scheduled payment. The Fund may also terminate a Systematic
Withdrawal Plan by notifying you in writing and will automatically terminate
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.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the
checking account is maintained at 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. Any payments made during that time will be sent to the
address of record on your account.
Institutional Accounts
There may be additional methods of buying, selling or exchanging shares of
the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for
the same class of shares of another Franklin Templeton Fund eligible for sale
in your state of residence and in conformity with that fund's stated
eligibility requirements and investment minimums. Some funds, however, may
not offer Class II shares. Class I shares may be exchanged for Class I shares
of any of the other Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any of the other Franklin Templeton Funds.
No exchanges between different classes of shares will be allowed. A
contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. Before making an exchange, you should review the prospectus of the
fund you wish to exchange from and the fund you wish to exchange into for all
specific requirements or limitations on exercising the exchange privilege,
for example, limitations on a fund's sale of its shares, minimum holding
periods for exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares
of the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of
the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in your account. The Fund and Investor Services
will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. Please see "Telephone Transactions - Verification
Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders from securities dealers who
execute a dealer or similar agreement with Distributors. See also "By
Telephone" above. Such a dealer-ordered exchange will be effective only for
uncertificated shares on deposit in your account or for which certificates
have previously been deposited. A securities dealer may charge a fee for
handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares
of a class which were purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and
the class of shares being purchased, unless the original investment in the
Franklin Templeton Funds was made pursuant to the privilege permitting
purchases at net asset value, as discussed under "How Do I Buy Shares?"
Exchanges of Class I shares of the Fund which were purchased with a lower
sales charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.
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 in accordance with
the procedures set forth above. Because the exchange is considered a
redemption and purchase of shares, you may realize a gain or loss for federal
income tax purposes. Backup withholding and information reporting may also
apply. Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and under
"Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege may result in
periodic large inflows of money. If this should occur, it is the general
policy of the Fund to initially invest this money in short-term, tax-exempt
municipal securities, unless it is felt that attractive investment
opportunities consistent with the Fund's investment objectives exist
immediately. Subsequently, this money will be withdrawn from such short-term
tax-exempt municipal securities and invested in portfolio securities in as
orderly a manner as is possible when attractive investment opportunities
arise.
The exchange privilege may be modified or discontinued by the Fund at any
time upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent
deferred sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from
reinvestment of dividends and capital gains are referred to as "free shares,"
shares which were originally subject to a contingent deferred sales charge
but to which the contingent deferred sales charge no longer applies are
called "matured shares," and shares still subject to the contingent deferred
sales charge are referred to as "CDSC liable shares." CDSC liable shares held
for different periods of time are considered different types of CDSC liable
shares. For instance, if you have $1,000 in free shares, $2,000 in matured
shares, and $3,000 in CDSC liable shares and 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. Similarly, if CDSC liable shares have
been purchased at different periods, a proportionate amount will be taken
from shares held for each period. If, for example, you hold $1,000 in shares
bought 3 months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months
ago and you exchange $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders
is the Franklin Templeton Money Fund II ("Money Fund II"), a series of the
Franklin Templeton Money Fund Trust. No drafts (checks) may be written on
Money Fund II accounts, nor may Class II shareholders purchase shares of
Money Fund II directly. Class II shares exchanged for shares of Money Fund II
will continue to age, for purposes of calculating the contingent deferred
sales charge, because they continue to be subject to Rule 12b-1 fees. The
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. Class I shares may be exchanged for shares of any of the money
market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money
market funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method such as first-in first-out or free shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even
though a redemption of such shares, as discussed elsewhere herein, may no
longer be subject to a contingent deferred sales charge. The proportional
method is believed by management to more closely meet and reflect the
expectations of Class II shareholders in the event shares are redeemed during
the contingency period. For federal income tax purposes, the cost basis of
shares redeemed or exchanged is determined under the Code without regard to
the method of transferring shares chosen by the Fund.
Market Timers
The Fund currently will not accept investments from Market Timers.
Transfers
Transfers between identically registered accounts in the same fund and class
are treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred
on the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds
to purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
By Mail
Send a written request signed by all registered owners to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per
share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated will receive the price calculated on the following business day.
The net asset value per share of each class is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. You are requested to provide a telephone number
where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more
joint owners of an account cannot be confirmed, (b) multiple owners have
a dispute or give inconsistent instructions to the Fund, (c) the Fund
has been notified of an adverse claim, (d) the instructions received by
the Fund are given by an agent, not the actual registered owner, (e) the
Fund determines that joint owners who are married to each other are
separated or may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership,
association, or other entity has not been established to the
satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state
banks, savings associations, savings and loan associations, trust companies,
savings banks, industrial loan companies and credit unions; (2) national
securities exchanges, registered securities associations and clearing
agencies; (3) securities dealers that are members of a national securities
exchange or a clearing agency or that have minimum net capital of $100,000;
or (4) institutions that participate in the Securities Transfer Agent
Medallion Program ("STAMP") or other recognized signature guarantee medallion
program. A notarized signature will not be sufficient for the request to be
in proper form.
When shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are
advised, for your protection, to send the share certificate and assignment
form in separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the
authorized officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying
the general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and
(2) a copy of the pertinent pages of the trust document listing the trustees
or a Certification for Trust if the trustees are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to you within seven days after
receipt of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone. You may obtain additional information about
telephone redemptions by writing to the Fund or Investor Services at the
address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions given by telephone are genuine. You, however, bear the risk of
loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent
only to the address of record.
Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, you should follow the
other redemption procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments and government
entities that qualify to purchase shares at net asset value pursuant to the
terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which
is available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have
entered into an agreement with Distributors. This is known as a repurchase.
The only difference between a normal redemption and a repurchase is that if
you redeem shares through a dealer, the redemption price will be the net
asset value next calculated after your dealer receives the order which is
promptly transmitted to the Fund, rather than on the day the Fund receives
your written request in proper form. The documents described under "By Mail"
above, as well as a signed letter of instruction, are required regardless of
whether you redeem shares directly or submit such shares to a securities
dealer for repurchase. Your letter should reference the Fund and the class,
the account number, the fact that the repurchase was ordered by a dealer and
the dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds
of your redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion
of Class I investments of $1 million or more and any Class II investments
redeemed within the contingency period (12 months for Class I and 18 months
for Class II) will be assessed a contingent deferred sales charge, unless one
of the exceptions described below applies. The charge is 1% of the lesser of
the value of the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the net asset value at the time of purchase of
such shares, and is retained by Distributors. The contingent deferred sales
charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) a calculated number of shares representing
amounts attributable to capital appreciation on shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held longer than the
contingency period. Shares subject to a contingent deferred sales charge will
then be redeemed on a "first-in, first-out" basis. For tax purposes, a
contingent deferred sales charge is treated as either a reduction in
redemption proceeds or an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: specified net asset value purchases discussed under "How Do
I Buy Shares? - Purchases at Net Asset Value"; exchanges; any account fees;
redemptions initiated by the Fund due to an account falling below the minimum
specified account size; redemptions following the death of the shareholder or
beneficial owner; and redemptions through a Systematic Withdrawal Plan set up
for shares prior to February 1, 1995, and for Systematic Withdrawal Plans set
up thereafter, redemptions of up to 1% monthly of an account's net asset
value (3% quarterly, 6% semiannually or 12% annually). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000
could be withdrawn through a once-yearly Systematic Withdrawal Plan free of
charge. Any amount over that $120,000 would be assessed a 1% contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000, only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that
month and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of
a specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check
will generally reduce this delay, shares purchased with these checks will
also be held pending clearance. Shares purchased by federal funds wire are
available for immediate redemption.
The right of redemption may be suspended or the date of payment postponed if
the Exchange is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is restricted or an
emergency exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less than the
amount you invested, depending on fluctuations in the market value of
securities owned by the Fund.
Other Information
Distribution or redemption checks sent to you do not earn interest or any
other income during the time such checks remain uncashed and neither the Fund
nor its affiliates will be liable for any loss caused by your failure to cash
such checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, if you
complete and file an Agreement as described under "How Do I Sell Shares? - By
Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the
purpose of establishing the caller's identification, and sending a
confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to you caused by an unauthorized
transaction. The Fund and Investor Services may be liable for any losses due
to unauthorized or fraudulent instructions in the event such reasonable
procedures are not followed. You are, of course, under no obligation to apply
for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction will not be
executed, and neither the Fund nor Investor Services will be liable for any
losses which may occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your
investment representative for assistance or send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses
resulting from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of each class of the Fund is determined as of
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each
day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate
gross value of all assets of each class, and then dividing the difference by
the number of shares of the class outstanding. Assets in the Fund's portfolio
are valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund,
except that each class will bear the Rule 12b-1 fees payable under its
respective plan. The net asset value of all outstanding shares of each class
of the Fund will be computed on a pro rata basis based on the proportionate
participation in the Fund represented by the value of shares of such class.
Due to the specific distribution expenses and other costs that will be
allocable to each class, the dividends paid to each class of the Fund may
vary.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access TeleFACTSAE. By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain Class I and Class II
account information, current price and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund.
In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 175 and 275, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from
the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
Hours of Operation
(Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain
several measures of a class' performance, including current yield, various
expressions of total return tax equivalent yield, taxable equivalent and
current distribution rate. They may also occasionally cite statistics to
reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion
thereof, to the extent applicable, through the end of the most recent
calendar quarter, assuming reinvestment of all distributions. The Fund may
also furnish total return quotations for each class for other periods or
based on investments at various sales charge levels or at net asset value.
For such purposes, total return equals the total of all income and capital
gain paid to shareholders, assuming reinvestment of all distributions, plus
(or minus) the change in the value of the original investment, expressed as a
percentage of the purchase price.
Current yield for each class reflects the income per share earned by the
Fund's portfolio investments. It is calculated for each class by dividing
that class' net investment income per share during a recent 30-day period by
the maximum public offering price for that class of shares on the last day of
that period and annualizing the result.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. It is computed by dividing the tax-exempt
portion of each class' yield (calculated as indicated) by one minus a stated
income tax rate and adding the product to the taxable portion (if any) of the
class' yield.
Current yield and tax equivalent yield for each class, which are calculated
according to a formula prescribed by the SEC (see "General Information" in
the SAI), are not indicative of the dividends or distributions which were or
will be paid to the Fund's shareholders. Dividends or distributions paid to
shareholders of a class are reflected in the current distribution rate or
taxable equivalent distribution rate, which may be quoted to you. The current
distribution rate is computed by dividing the total amount of dividends per
share paid by a class during the past 12 months by a current maximum offering
price for that class of shares. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after tax
distribution rate equivalent to that of a fund which invests in tax-exempt
obligations. Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during
the past 12 months. The current distribution rate differs from the current
yield computation because it may include distributions to shareholders from
sources other than dividends and interest, such as short-term capital gain,
and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect
all recurring charges against a class' income and will assume the payment of
the maximum sales charge on the purchase of that class of shares. When there
has been a change in the sales charge structure, the historical performance
figures will be restated to reflect the new rate. The investment results of
each class, like all other investment companies, will fluctuate over time;
thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' performance may be in any
future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends May 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are
automatically sent to shareholders. To reduce the volume of mail sent to each
household, as well as to reduce Fund expenses, Investor Services will attempt
to identify related shareholders within a household and send only one copy of
the report. Additional copies may be obtained, without charge, upon request
to the Trust at the telephone number or address set forth on the cover page
of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the
net assets of such series upon liquidation or dissolution. Shares of each
class of a series have the same voting and other rights and preferences as
the other classes and series of the Trust for matters that affect the Trust
as a whole. Additional series or classes may be added in the future by the
Board.
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 a certain class of the Fund's shares, however, only
shareholders of that class will be entitled to vote. Therefore each class of
shares will vote separately on matters (1) affecting only that class, (2)
expressly required to be voted on separately by class by state business trust
law, or (3) required to be voted on separately by class by the 1940 Act, or
the rules adopted thereunder. For instance, if a change to the Rule 12b-1
plan relating to Class I shares requires shareholder approval, only
shareholders of Class I may vote on the change to the Rule 12b-1 plan
affecting that class. Similarly, if a change to the Rule 12b-1 plan relating
to Class II shares requires approval, only shareholders of Class II may vote
on changes to such plan. On the other hand, if there is a proposed change to
the investment objectives of the Fund, the proposal would affect all
shareholders, regardless of which class of shares they hold and, therefore,
each share has the same voting rights.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees,
if they choose to do so, and in such event the holders of the remaining
shares voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes
as changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees
in their discretion or by shareholders holding at least ten percent of the
outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or
removal of trustees such as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if
your account has a value of less than $50 but only where the value of your
account has been reduced by the prior voluntary redemption of shares and has
been inactive (except for the reinvestment of distributions) for a period of
at least six months, provided you are given advance notice. For more
information, see "How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as
"Owner 1" and "Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability to redeem or
convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may
require court action to obtain release of the funds until the minor reaches
the legal age of majority. The account should be registered in the name of
one "Adult" as custodian for the benefit of the "Minor" under the Uniform
Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used
if the account is being established pursuant to a legal, valid trust
document. Use of such a designation in the absence of a legal trust document
may cause difficulties and require court action for transfer or redemption of
the funds.
Shares, whether in certificate form or not, registered as joint tenants or
"Jt Ten" shall mean "as joint tenants with rights of survivorship" and not
"as tenants in common."
Except as indicated, you may transfer an account in the Fund carried in
"street" or "nominee" name by your securities dealer to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform your delivering securities dealer. To effect the
transfer, you should instruct the securities dealer to transfer the account
to a receiving securities dealer and sign any documents required by the
securities dealers to evidence consent to the transfer. Under current
procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in
proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed
in publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you
will be deemed to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated through the services
of the NSCC, to have adopted as instruction and signature any such electronic
instructions received by the Fund and Investor Services, and to have
authorized them to execute the instructions without further inquiry. At the
present time, such services which are available include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required
to report to the IRS any taxable dividend, capital gain distribution, or
other reportable payment (including share redemption proceeds) and withhold
31% of any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer identification number
("TIN") and made certain required certifications that appear in the
Shareholder Application. You may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number furnished by you
is incorrect or that you are subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the then-current net asset
value upon receipt of notice from the IRS that the TIN certified as correct
by you is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
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.
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 FundsAE 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.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timers - 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.
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. When you buy, sell or exchange shares, we
will use the NAV per share for the applicable class next calculated after we
receive your request in proper form.
Offering price - The public offering price is equal to the net asset value
per share of the class plus the front-end sales charge. The front-end sales
charge is Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have 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.
TeleFACTSAE - 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.
Appendix
Description of 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
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.
Description of 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.
Description of 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.
Franklin California High Yield Municipal Fund
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Investment Manager
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Principal Underwriter
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Shareholder Services Agent
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Custodian
The Bank of New York
Mutual Funds Division
90 Washington Street
New York, N.Y. 10286
Independent Auditors
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
Legal Counsel
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
For an enlarged version of this prospectus
please call 1-800/DIAL BEN.
Your Representative Is:
175 P05/96
FRANKLIN
MUNICIPAL
SECURITIES TRUST
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN HAWAII MUNICIPAL BOND FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
OCTOBER 1, 1995, AS AMENDED APRIL [] 1996
CONTENTS PAGE
How Do the Funds Invest Their Assets?
Description of Municipal and
Other Securities
Investment Restrictions
Officers and Trustees
Investment Advisory and Other Services
How Do the Funds Purchase Securities for Their Portfolio
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information Regarding Taxation
The Fund's Underwriter
General Information
Financial Statements
Appendix A - Further Information on
Special Factors Affecting Each State Fund
Appendix B - Description of Municipal
Securities Ratings
Franklin Municipal Securities Trust (the "Trust") is an open-end management
investment company consisting of five separate, non-diversified series:
Franklin Arkansas Municipal Bond Fund (the "Arkansas Fund"), Franklin
California High Yield Municipal Fund (the "California Fund"), Franklin Hawaii
Municipal Bond Fund (the "Hawaii Fund"), Franklin Tennessee Municipal Bond
Fund (the "Tennessee Fund") and Franklin Washington Municipal Bond Fund (the
"Washington Fund"), each of which may be referred to collectively or
separately as the "Funds" or "Fund." Each Fund seeks to provide investors
with as high a level of income exempt from regular federal income taxes as is
consistent with prudent investing, while seeking preservation of
shareholders' capital. The Arkansas, California, Hawaii and Tennessee Funds
also seek to provide a maximum level of income which is exempt from state
personal income taxes for resident shareholders of each such state. The state
of Washington currently imposes no state income tax. As a secondary objective
the California Fund will seek capital appreciation to the extent this is
possible and is consistent with its principal investment objective.
Each Fund seeks to accomplish its objective by investing primarily in
municipal securities issued by its respective state and the state's political
subdivisions, agencies and instrumentalities which pay interest exempt such
state's personal income taxes (if any) and regular federal income taxes.
Each Fund's (except the California Fund) investments in municipal securities
will be limited to such investments rated in one of the four highest ratings
categories by a recognized ratings agency or in securities which are not
rated, but deemed to be comparable in quality. In addition to its ability to
invest in higher rated municipal securities, the California High Yield Fund
may invest, without percentage limitation, in lower rated or unrated but
deemed to be comparable in quality municipal securities.
The California Fund offers two classes of shares: Franklin California High
Yield Municipal Fund - Class I ("Class I") and Franklin California High Yield
Municipal Fund - Class II ("Class II").This multiclass structure allows you
to consider, among other features, the impact of sales charges and
distribution fees ("Rule 12b-1 fees") on you investment in the Fund. The
other series sales charges and Rule 12b-1 fees are similar to the Class I
structure and are discussed as Class I for those purposes.
A Prospectus for the California Fund, dated October 1, 1995, as amended April
[], 1996, and a Prospectus for Arkansas, Hawaii, Tennessee and Washington
Funds, dated October 1, 1995, each as may be further amended from time to
time, provide the basic information a prospective investor should know before
investing in a Fund and may be obtained without charge from the Trust or from
its principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE AN INVESTOR WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST AND EACH
FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUSES.
EACH FUND'S INVESTMENT
OBJECTIVE AND POLICIES
As noted in the prospectuses, each Fund attempts to invest 100% and, as a
matter of fundamental policy, invests at least 80% of the value of its net
assets in municipal securities, the interest on which is exempt from regular
federal income taxes, but which may be deemed to be a preference item under
the federal alternative minimum tax. It is also the policy of each Fund to
invest at least 65% of its total assets in bonds which pay interest that is
exempt from personal income tax in its respective state, where such state
imposes an income tax. Interest paid on certain types of municipal
obligations, such as "private activity bonds," and the dividends to be paid
by each Fund therefrom, although exempt from regular federal income tax, may
be deemed to be a preference item under the federal alternative minimum tax,
and thus subject to the federal alternative minimum tax.
It is possible, although not anticipated, that up to 20% of each Fund's net
assets could be in obligations subject to regular federal taxation and/or up
to 35% of each Fund's total assets could be in municipal securities from
other states. In addition, it is possible that each Fund's investments could
consist entirely of bonds, the interest on which is subject to the federal
alternative minimum tax.
The Arkansas, Hawaii, Tennessee and Washington Funds may invest, without
percentage limitation, in securities having at the time of purchase one of
the four highest ratings of one or more of a nationally recognized
statistical rating organization ("NRSRO"). These ratings are Aaa, Aa, A, Baa,
by Moody's Investors Service ("Moody's"), AAA, AA, A, BBB by Standard &
Poor's Corporation ("S&P") or AAA, AA, A, BBB by Fitch Investors Service,
Inc. ("Fitch.") The Funds may also invest in securities which are not rated,
provided that, in the opinion of the Fund's investment manager, Franklin
Advisers, Inc. ("Advisers" or "Manager"), such securities are comparable in
quality to those within the four highest ratings. These are considered to be
"investment grade" securities, although bonds rated in the fourth highest
rating category by the foregoing rating services are regarded as having an
adequate capacity to pay principal and interest but with greater
vulnerability to adverse economic conditions and to have some speculative
characteristics. In addition, the California High Yield Fund may invest,
without percentage limitation, in lower rated securities and may invest up to
5% of its assets (at the time of purchase) in defaulted securities. Risk
considerations of investments in lower rated bonds are described in the
Prospectus for the California Fund. Please see "Appendix B" for a description
of the ratings.
Although each Fund seeks to invest all its assets in a manner designed to
accomplish its objectives, there may be times where market conditions limit
the availability of appropriate municipal securities or, in the Manager's
opinion, there exist uncertain economic, market, political, or legal
conditions which may jeopardize the value of municipal securities.
Accordingly, for temporary defensive purposes, each Fund may invest more than
20% and up to 100% of its total assets in taxable, fixed-income obligations,
and each Fund may invest more than 35% and up to 100% of the value of its
total assets in instruments, the interest on which is exempt from regular
federal income taxes, but not the respective state's personal income tax,
where such state imposes an income tax.
It is the policy of each Fund that illiquid securities (a term which means
securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the net assets of the Fund.
DESCRIPTION OF MUNICIPAL
AND OTHER SECURITIES
Each Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which each Fund may invest.
TAX ANTICIPATION NOTES. These are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax
revenues to be payable from these specific future taxes. They are usually
general obligations of the issuer, secured by the taxing power for the
payment of principal and interest.
REVENUE ANTICIPATION NOTES. 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 are normally issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then provide
the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES. 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.
MUNICIPAL BONDS. Municipal Bonds which meet longer-term capital needs and
generally have maturities of more than one year when issued, have two
principal classifications: general obligation bonds and revenue bonds.
1. GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and
sewer systems. The basic security behind general obligation bonds is the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
2. REVENUE BONDS. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects including: electric, gas, water, and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these
bonds may vary, many provide additional security in the form of a debt
service reserve fund, from which money may be used to make principal and
interest payments on the issuer's obligations. Housing finance authorities
have a wide range of security, including partially or fully insured
mortgages, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Some authorities are provided
with further security in the form of state assurance (although without
obligation) to make up deficiencies in the debt service reserve fund.
INDUSTRIAL DEVELOPMENT BONDS. These are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money for the financing
of various privately-operated facilities for business manufacturing, housing,
sports, and pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds is solely dependent on
the ability of the facilities user to meet its financial obligations and the
pledge, if any, of the real and personal property so financed as security for
such payment.
VARIABLE OR FLOATING RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period (generally up to 30
days) prior to specified dates, either from the issuer or by drawing on a
bank letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily
up to monthly, and are calculated to maintain the market value of the VRDN at
approximately its par value upon the adjustment date.
ZERO COUPON SECURITIES. A Fund's investment in zero coupon and delayed
interest bonds may cause a Fund to recognize income and make distributions to
shareholders prior to the receipt of cash payments. Zero-coupon securities
make no periodic interest payments but instead are sold at a deep discount
from their face value. The buyer receives a rate of return determined by the
gradual appreciation of the security, which is redeemed at face value on a
specific maturity date.
Because zero-coupon securities bear no interest and compound semi-annually at
the rate fixed at the time of issuance, the value of such securities is
generally more volatile than other fixed-income securities. Since
zero-coupon bondholders do not receive interest payments, zeros fall more
dramatically than bonds paying interest on a current basis when interest
rates rise. When interest rates fall, zero-coupon securities rise more
rapidly in value, because the bonds reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements, a Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
WHEN-ISSUED PURCHASES. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place after the date that the offer is
accepted. The purchase price and the yield that will be received on the
securities are each fixed at the time the buyer enters into the commitment.
While the Trust will always make commitments to purchase such securities with
the intention of actually acquiring the securities, it may nevertheless sell
these securities before the settlement date if it is deemed advisable as a
matter of investment strategy. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, the Fund would
earn no income; however, it is each Fund's intention to be fully invested to
the extent practicable and subject to the policies stated in the Prospectus.
At the time the Trust makes the commitment to purchase a municipal bond on a
when-issued basis, it will record the transaction and reflect the value of
the security in determining each Fund's net asset value. The Trust does not
believe that each Fund's net asset value or income will be adversely affected
by the purchase of municipal bonds on a when-issued basis. Each Fund will
establish a segregated account, in which it will maintain cash and marketable
securities equal in value to commitments for when-issued securities.
OTHER. Escrow secured bonds or defeased bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) an outstanding bond issue
which is not immediately callable, and it becomes necessary or desirable to
set aside funds for redemption of the bonds at a future date. In an advance
refunding, the issuer will use the proceeds of a new bond issue to purchase
high grade interest bearing debt securities which are then deposited in an
irrevocable escrow account held by a trustee bank to secure all future
payments of principal and interest of the advance refunded bond. Escrow
secured bonds will often receive a AAA rating from S&P and Moody's.
Commercial Paper refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities
and in which each Fund may invest so long as they are consistent with the
Fund's investment objective and policies.
OTHER TYPES OF INVESTMENTS
The Funds may invest in all types of U.S. government securities including:
(1) U.S. Treasury obligations with varying interest rates, maturities and
dates of issuance, such as U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (original maturities of one to ten years) and U.S.
Treasury bonds (generally original maturities of greater than ten years); and
(2) obligations issued or guaranteed by U.S. government agencies and
instrumentalities, such as GNMA, the Export-Import Bank and the Farmers Home
Administration. Some of the Fund's investments will include obligations which
are supported by the full faith and credit pledge of the U.S. government. In
the case of U.S. government obligations which are not backed by the full
faith and credit pledge of the U.S. government (e.g., obligations of FNMA and
a Federal Home Loan Bank), a Fund must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments.
OTHER POLICIES
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Board and subject to the following conditions, each Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan. The borrower must
deposit with the Fund's custodian bank collateral with an initial market
value of at least 102% of the initial market value of the securities loaned,
including any accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
102%. Such collateral shall consist of cash. The lending of securities is a
common practice in the securities industry. A Fund engages in security loan
arrangements with the primary objective of increasing the Fund's income
either through investing the cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions as fundamental policies of
each Fund, which means that they may not be changed without the approval of a
majority of the outstanding voting securities of the Fund. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), a "vote of a
majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser 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. The Funds MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowing (and a pledge of assets therefore) for temporary or emergency
purposes may be made from banks in any amount up to 5% of the total asset
value.
2. Buy any securities on "margin" or sell any securities "short," except
that it may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except by engaging in repurchase transactions and except
through the purchase of readily marketable debt securities which are either
publicly distributed or customarily purchased by institutional investors.
Although such loans are not presently intended, this prohibition will not
preclude a Fund from loaning portfolio securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such portfolio security loans may not be
made if, as a result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities,
except that, in the case of the Arkansas and Tennessee Funds, all or
substantially all of the assets of either Fund may be invested in another
registered investment company having the same investment objective and
policies as the Fund.
5. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of
the Trust's officers, trustees, or investment adviser own beneficially more
than 1/2 of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities, except
that, in the case of the Arkansas and Tennessee Funds, to the extent this
restriction is applicable, all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund, or except as permitted under
investment restriction Number 9 regarding the purchase of shares of money
market funds managed by Advisers or its affiliates.
6. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this
limitation shall not prohibit the purchase of municipal and other debt
securities secured by real estate or interests therein.
7. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads, or any combination thereof, or interests in oil, gas, or other
mineral exploration or development programs, except that it may purchase,
hold, and dispose of obligations with puts attached in accordance with its
investment policies.
8. Invest in companies for the purpose of exercising control or management,
except that, in the case of the Arkansas and Tennessee Funds, to the extent
this restriction is applicable, all or substantially all of the assets of
either Fund may be invested in another registered investment company having
the same investment objective and policies as the Fund.
9. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization, provided that,
in the case of the Arkansas and Tennessee Funds, all or substantially all of
the assets of either Fund may be invested in another registered investment
company having the same investment objective and policies as the Fund. To the
extent permitted by exemptions which may be granted under the 1940 Act, each
Fund may invest in shares of one or more money market funds managed by
Advisers or its affiliates.
10. Invest more than 25% of its assets in securities of any industry, except
that, in the case of the Arkansas and Tennessee Funds, to the extent this
restriction is applicable, all or substantially all of the assets of either
Fund may be invested in another registered investment company having the same
investment objective and policies as the Fund. For purposes of this
limitation, municipal securities and U.S. government obligations are not
considered to be part of any industry.
So long as the percentage restrictions above are observed by each Fund at the
time it purchases any security, changes in values of particular Fund assets
or the assets of a Fund as a whole will not cause a violation of any of the
foregoing restrictions.
To the extent municipal securities constitute securities issued to finance
non-governmental business activities, they are generally not deemed to be
exempt from taxation under federal law. As such, these securities, if
purchased by a Fund, will be subject to the prohibition in investment
restriction number 10 against concentrating in an industry.
In addition, the Funds may not invest in real estate limited partnerships or
in interests in oil, gas or other mineral leases.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust and
each Fund, including general supervision and review of each Fund's investment
activities. The trustees, in turn, elect the officers of the Trust who are
responsible for administering day-to-day operations of the Trust and each
Fund. The affiliations of the officers and trustees and their principal
occupations for the past five years are listed below. Trustees who are deemed
to be "interested persons" of the Trust, as defined in the 1940 Act, are
indicated by an asterisk (*).
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of
the investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the
Franklin Templeton Group of Funds.
*Harmon E. Burns (51)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; officer and/or director, as the
case may be, of other subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee of 43 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General
Host Corporation; director, trustee or managing general partner, as the case
may be, of 58 of the investment companies in the Franklin Templeton Group of
Funds.
David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley
Science Corporation (a venture capital company); and director, trustee or
managing general partner, as the case may be, of 30 of the investment
companies in the Franklin Group of Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr.(55)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer
and/or director, trustee or managing general partner, as the case may be, of
most other subsidiaries of Franklin Resources, Inc. and of 43 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case
may be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation
(industrial technology); and director, trustee or managing general partner,
as the case may be, of 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly held the following positions:
Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors;
and President, National Association of Securities Dealers, Inc.
Hayato Tanaka (78)
277 Haihai Street
Hilo, HI 96720
Trustee
Retired, former owner of The Jewel Box Orchids; and director or trustee, as
the case may be, of two of the Franklin Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case
may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment
companies in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; officer of most other subsidiaries of Franklin Resources,
Inc.; and officer of 61 of the investment companies in the Franklin Templeton
Group of Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 37 of the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case
may be, of 26 of the investment companies in the Franklin Templeton Group of
Funds.
Thomas J. Kenny (33)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 32 of the investment companies in the
Franklin Group of Funds.
Trustees not affiliated with the investment manager ("nonaffiliated
trustees") may in the future be, but are not currently paid fees. As
indicated above, certain of the Trust's nonaffiliated trustees also serve as
directors, trustees or managing general partners of other investment
companies in the Franklin Group of Funds" and the Templeton Group of Funds
(the "Franklin Templeton Group of Funds") from which they may receive fees
for their services. The following table indicates the total fees paid to
nonaffiliated trustees by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF BOARDS IN THE
TOTAL FEES RECEIVED FRANKLIN TEMPLETON
FROM THE FRANKLIN GROUP OF FUNDS* ON
TEMPLETON WHICH EACH SERVES**
NAME GROUP OF FUNDS*
- ---- --------------
Frank H. Abbott, III $162,420 31
Harris J. Ashton 327,925 56
S. Joseph Fortunato 344,745 58
David Garbellano 146,100 30
Frank W.T. LaHaye 143,200 26
Gordon S. Macklin 321,525 53
Hayato Tanaka 500 2
*For the calendar year ended December 31, 1995.
**The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
trustees are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 162
U.S. based funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or trustee received any other
compensation directly from the Trust. Certain officers or trustees who are
shareholders of Franklin Resources, Inc.("Resources") may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of February 14 1996, the trustees and officers, as a group, owned of
record and beneficially approximately 10,268 shares of the California Fund,
or less than 1% of the total outstanding shares of the California Fund and no
shares of the other Funds. Many of the Trust's trustees also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles
E. Johnson is the son and nephew, respectively, of Charles B. Johnson and
Rupert H. Johnson, Jr., who are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of each Fund in the Trust is Advisers. Advisers is a
wholly-owned subsidiary of Resources a publicly-owned holding company whose
shares are listed on the New York Stock Exchange (the "Exchange"). Resources
owns several other subsidiaries that are involved in investment management
and shareholder services.
Pursuant to the management agreement, the Manager provides investment
research and portfolio management services, including the selection of
securities for the Fund to purchase, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. The
Manager's extensive research activities include, as appropriate, traveling to
meet with issuers and to review project sites. The Manager's activities are
subject to the review and supervision of the Board to whom the Manager
renders periodic reports of the Fund's investment activities. Under the terms
of the management agreement, the Manager provides office space and office
furnishings, facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and provides certain
telephone and other mechanical services. The Manager is covered by fidelity
insurance on its officers, directors and employees for the protection of the
Fund. Please see the Statement of Operations in the financial statements
included in the Fund's Annual Report to Shareholders for the fiscal year
ended May 31, 1995.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The
Manager may give advice and take action with respect to any of the other
funds it manages, or for its own account, which may differ from action taken
by the Manager on behalf of the Fund. Similarly, with respect to the Fund,
the Manager is not obligated to recommend, purchase or sell, or to refrain
from recommending, purchasing or selling any security that the Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund. Furthermore, the
Manager is not obligated to refrain from investing in securities held by the
Fund or other funds which it manages or administers. Of course, any
transactions for the accounts of the Manager and other access persons will be
made in compliance with the Fund's Code of Ethics.
Pursuant to the management agreement, each Fund is obligated to pay the
Manager a fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund in excess of
$100 million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1%
per year) of net assets of the Fund in excess of $250 million. The fee is
computed and paid monthly based on the average daily net assets of each Fund
during the month. Each class of the California Fund will pay its share of the
management fee, as determined by the proportion of the Fund that each class
represents.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Funds as prescribed by any state in which the
Funds' shares are offered for sale. The most stringent current limit requires
the Manager to reduce or eliminate its fee to the extent that aggregate
operating expenses of each Fund (excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation costs) would
otherwise exceed in any fiscal year 2.5% of the first $30 million of average
net assets of the Fund, 2.0% of the next $70 million of average net assets of
the Fund and 1.5% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on state
requirements.
The Manager has agreed in advance to waive all of its management fees and
make certain payments to reduce expenses. The table below sets forth on a per
Fund basis the management fees before any advance waiver and the fees paid
for the fiscal years ended May 31, 1993, 1994, and 1995 and for the six
months ended November 30, 1995.
FEES BEFORE MANAGEMENT
ADVANCE FEES PAID
1995* WAIVER BY THE FUND
------ -----------
Arkansas Fund $ 15,828 $ 0
California Fund 181,128 43,361
Hawaii Fund 117,033 24,789
Tennessee Fund 23,617 0
Washington Fund 18,258 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
1993
Arkansas Fund n/a n/a
California Fund 1,175 0
Hawaii Fund 61,202 0
Tennessee Fund n/a n/a
Washington Fund 1,167 0
*For the six-month period ended November 30, 1995.
The management agreement is in effect until March 31, 1996. Thereafter, it
may continue in effect for successive annual periods providing such
continuance is specifically approved at least annually by a vote of the 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 Fund's trustees who
are not parties to the management agreement or interested persons of any such
party (other than as trustees of the Trust), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or , as to each Fund, by a vote of the
holders of a majority of the Fund's outstanding voting securities, or by the
Manager on 30 days' written notice and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"), a
wholly-owned subsidiary of Resources, is the shareholder servicing agent for
the Fund 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.
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.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended May 31,
1995, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended May 31, 1995.
HOW DO THE FUNDS PURCHASE SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the Funds are principal transactions at net prices,
the Funds incur little or no brokerage costs. The Funds deal directly with
the selling or purchasing principal or market maker without incurring charges
for the services of a broker on their behalf, unless it is determined that a
better price or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask prices. As a
general rule, the Fund does not purchase 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 rendered by such dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services received by the Manager from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the Manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staff of other securities firms. As long as it is
lawful and appropriate to do so, the Manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
Provided that the Trust's officers are satisfied that the best execution is
obtained, the sale of Fund shares may also be considered as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
During the past three fiscal years ended May 31, 1995, and the six months
ended November 30, 1995 the Funds paid no brokerage commissions. As of May 31
1995, the Funds did not own securities of their regular broker-dealers.
HOW DO I BUY AND SELL SHARES?
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the funds into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of a Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectuses.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to a Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to a Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.
The Funds may deduct from your account the costs of its efforts to locate you
if mail is returned as undeliverable or the Funds are otherwise unable to
locate you or verify your current mailing address. These costs may include a
percentage of the account when a search company charges a percentage fee in
exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Funds'
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate
in the discretionary trusts. Pursuant to agreements, a portion of such
service fees may be paid to Distributors or 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 Funds may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares will be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of a Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted
to the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial
institutions after the scheduled close of the Exchange will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial
institutions which, either directly or through affiliates, have an agreement
with Distributors to handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject
to the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion
and any loss to you resulting from the failure to do so must be settled
between you and the securities dealer.
OTHER PAYMENTS TO SECURITIES DEALERS
As discussed in the Prospectuses under "How Do I Buy Shares? - General,"
either Distributors or one of its affiliates may make payments, out of its
own resources, to securities dealers who initiate and are responsible for
purchases of Class I shares made at net asset value by certain trust
companies and trust departments of banks, as described below. Distributors
may make these payments in the form of contingent advance payments, which may
be recovered from the securities dealer or set off against other payments due
to the securities dealer in the event shares are redeemed within 12 months of
the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the securities dealer.
LETTER OF INTENT
You may qualify for a reduced sales charge on the purchase of Class I shares
of the Fund, as described in the Prospectus. At any time within 90 days after
the first investment which you want to qualify for a reduced sales charge,
you may file with the Fund a signed Shareholder Application with the Letter
of Intent (the "Letter") 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
upon purchases in more than one of the Franklin Templeton Funds will be
effective only after notification to Distributors that the investment
qualifies for a discount. 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 upon the amount actually purchased (less redemptions) during the
period. If you execute a Letter prior to a change in the sales charge
structure for the Fund, you will be entitled to 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 Prospectus, 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. If the 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 the total
purchases, less redemptions, exceed the amount specified under the Letter and
is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made pursuant to the Letter (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 such purchases had been made at a single time. Upon such
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.
REDEMPTIONS IN KIND
Each Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during
any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's
net assets at the beginning of the 90-day period. This commitment is
irrevocable without the prior approval of the Securities and Exchange
Commission ("SEC"). In the case of redemption requests in excess of these
amounts, the trustees reserve 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 such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets and you
may incur brokerage fees in converting the securities to cash. The Funds do
not intend to redeem illiquid securities in kind. Should it happen, however,
you may not be able to recover your investment in a timely manner.
REDEMPTIONS BY THE FUNDS
Due to the relatively high cost of handling small investments, the Funds
reserve the right to involuntarily redeem your shares at net asset value if
your account has a value of less than one-half of your initial required
minimum investment, but only where the value of your account has been reduced
by the prior voluntary redemption of shares. Until further notice, it is the
present policy of the Funds not to exercise this right if your account has a
value of $50 or more. In any event, before the Funds redeem your shares and
sends you the proceeds, it will notify you that the value of the shares in
your account is less than the minimum amount and allow you 30 days to make an
additional investment in an amount which will increase the value of your
account to at least $100.
REPORTS TO SHAREHOLDERS
The Trust sends annual and semiannual reports regarding its performance and
portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
SPECIAL SERVICES
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund.
The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain
omnibus accounts with the Funds on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Fund normally
pays Investor Services. These financial institutions may also charge a fee
for their services directly to their clients.
HOW ARE FUND SHARES VALUED?
As noted in the Prospectus, each Fund calculates the net asset value 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 Trust is informed that the Exchange observes the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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 which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager.
Municipal securities generally trade in the over-the-counter market rather
than on a securities exchange.
Generally, trading in, U.S. government securities and tax-free money market
instruments is substantially completed each day at various times prior to the
scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Fund's shares is determined as of those
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 which will not be reflected in the computation of the net
asset value of each class of the Funds. If events materially affecting the
values of these securities occur during such period, then 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
trustees, the Trust may utilize a pricing service, bank or securities dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION REGARDING TAXATION
As stated in the Prospectuses, each fund has elected to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). The trustees reserve the right not to
maintain the qualification of any Fund as a regulated investment company if
they determine such course of action to be beneficial to the shareholders. In
such case, a Fund will be subject to federal and possibly state corporate
taxes on its taxable income and gains, to the alternative minimum tax on a
portion of its tax-exempt income, and distributions (including tax-exempt
interest dividends to shareholders) will be taxable to the extent of such
Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the 12-month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to shareholders by December 31 of each
year in order to avoid the imposition of a federal excise tax. Under these
rules, certain distributions which are declared in October, November or
December but which, for operational reasons, may not be paid to you until the
following January, will be treated for tax purposes as if paid by the Funds
and received 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, 1995, qualified for this deduction and it is not anticipated
that any of the current year dividends for any of the Funds will so qualify.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of such Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of a Fund
will not be included in the federal tax basis of such shares sold or
exchanged within 90 days of their purchase (for purposes of determining gain
or loss with respect to such shares) if the sales proceeds are reinvested in
the Fund or in another fund in the Franklin Templeton Funds (defined under
"How Do I Buy Shares?" or "How to Buy Shares of Each Fund" in the
Prospectuses) and a sales charge which would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to 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 a Fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements
that must be met by a fund. Investments in GNMA/FNMA securities and
repurchase agreements collateralized by U.S. Government securities do not
generally qualify for tax-free treatment. While it is not the primary
investment objective of any Fund of the Trust to invest in such obligations,
the Funds are authorized to so invest for temporary or defensive purposes. To
the extent that such investments are made, any affected Fund will provide
shareholders with the percentage of any dividends paid which may qualify for
such tax-free treatment at the end of each calendar year. 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 "substantial users" (or a related person)
of facilities financed by private activity bonds you should consult with your
tax advisor before purchasing shares of the Funds.
THE TRUST'S UNDERWRITER
Pursuant to an underwriting agreement in effect until March 31, 1996,
Distributors acts as principal underwriter in a continuous public offering
for both classes of the Trust's shares. The underwriting agreement will
continue in effect for successive annual periods provided that its
continuance is specifically approved at least annually by a vote of the Board
or. as to each Fund, 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
Trust's trustees who are not parties to the underwriting agreement or
interested persons of any such party (other than as directors trustees of the
Trust), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of 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 Trust 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 of the
Funds.
In connection with the offering of the Funds' shares, aggregate underwriting
commissions received by Distributors for the fiscal years ended May 31, 1993,
1994, and 1995 and for the six months ended November 30, 1995, and the
amounts retained after reallowances to dealers were as follows:
TOTAL TOTAL
COMMISSIONS COMMISSIONS
1995* RECEIVED RETAINED
- ----- -------- --------
Arkansas Fund $ 49,137 $ 3,066
California Fund 698,339 31,585
Hawaii Fund 97,045 626
Tennessee Fund 85,104 5,620
Washington Fund 9,757 608
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
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
1993
Arkansas Fund n/a n/a
California Fund 1,801 0
Hawaii Fund 538,200 54,367
Tennessee Fund n/a n/a
Washington Fund 0 0
*For the six-month period ended November 30, 1995.
Distributors may be entitled to reimbursement under the distribution plans
for each class, as discussed below. Except as noted, Distributors received no
other compensation for acting as underwriter of the Funds.
DISTRIBUTION PLANS
Each class of the Funds have adopted a distribution plan pursuant to Rule
12b-1 under the 1940 Act (the "Class I Plan" and "Class II Plan,"
respectively, or "Plan(s)").
THE CLASS I PLAN. Under the Class I Plan, The Hawaii Fund may pay up to a
maximum of .10% per annum 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 may each pay up to a maximum
of .15% per annum of its average daily net assets.
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum stated above) for actual expenses
incurred in the distribution and promotion of Class I shares, including, but
not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including
a prorated portion of Distributors' overhead expenses attributable to the
distribution of Class I shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates.
THE CLASS II PLAN. Under the California Fund Class II Plan, the Fund pays
Distributors up to .50% per annum of the average daily net assets of Class
II, 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 expenses of
distribution and marketing over this amount will be borne by Distributors or
others who have incurred them without reimbursement by the Fund. Under the
Class II Plan, the Fund also pays an additional .15% per annum of the average
daily net assets of Class II, payable quarterly, as a servicing fee. This fee
will be used to pay dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers; and
similar activities related to furnishing personal services and maintaining
shareholder accounts. At the time of investment, Distributors may pay the
securities dealer a commission of up to 1% of the amount invested out of its
own resources.
CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under the Plans, each Plan also provides that to the
extent the Funds, the Manager or Distributors or other parties on behalf of
the Funds, the Manager or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
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 the Plans 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 the Plans, plus any other payments deemed to be made
pursuant to the Plans, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc., Article III, Section 26(d)4.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the Plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. Such banking institutions, however, are
permitted to receive fees under the Plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing such services, you would be permitted to remain a shareholder of
the Fund, and alternate means for continuing the servicing would be sought.
In such an 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.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through March 31, 1996 for Class I and through April
30, 1997 for Class II, and renewable annually by a vote of the Board,
including a majority vote of the trustees who are non-interested persons of
the Trust and who have no direct or indirect financial interest in the
operation of the Plans, cast in person at a meeting called for that purpose.
It is also required that the selection and nomination of such trustees be
done by the non-interested trustees. The Plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the Manager, or
the underwriting agreement with Distributors, or, as to each Fund or class by
vote of a majority of the outstanding shares of the Fund or class.
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 Fund or class, and all
material amendments to the Plans or any related agreements shall be approved
by a vote of the non-interested trustees, cast in person at a meeting called
for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board 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, 1995, and the six months ended November 30,
1995, the total amount paid by each Fund pursuant to the Plans was paid to
brokers or dealers in the amounts listed below.
FUND FISCAL YEAR SIX-MONTHS
ENDED MAY 31, PERIOD ENDED
1995 AMOUNT PAID NOVEMBER 30, 1995
Arkansas Fund $ 898 $ 1,458
California Fund 35,842 25,054
Hawaii Fund 19,175 16,600
Tennessee Fund 1,672 2,952
Washington Fund 2,286 1,591
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time quote various
performance figures for each class to illustrate past performance and may
occasionally cite statistics to reflect volatility or risk. Performance
quotations by investment companies are subject to rules adopted by the SEC.
These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by the Fund are based on the standardized
methods of computing performance mandated by the SEC. An explanation of those
and other methods used by the Fund to compute or express performance for each
class follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, or
fractional portion thereof, that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes the
maximum front-end sales charge is deducted from the initial $1,000 purchase
order, and income dividends and capital gains are reinvested at net asset
value. The quotation assumes the account was completely redeemed at the end
of each one-, five- and ten-year period and the deduction of all applicable
charges and fees. If a change is made on the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
In considering the quotations of total return by each Fund, you should
remember that the maximum front-end sales charge reflected in each quotation
is a one time fee (charged on all direct purchases), which will have its
greatest impact during the early stages of your investment in that Fund. This
charge will affect actual performance less the longer you retain your
investment in the Fund. The average annual compounded rates of return for
Class I shares for the one-year period ended on November 30, 1995 and for the
period from inception of each Class I shares to November 30, 1995, were as
follows:
AVERAGE ANNUAL
TOTAL RETURN
INCEPTION ONE- FROM
OF THE FUND YEAR INCEPTION
Arkansas Fund 05/10/94 15.51% 5.24%
California Fund 05/03/93 13.13% 4.72%
Hawaii Fund 02/26/92 15.71% 6.87%
Tennessee Fund 05/10/94 15.78% 6.68%
Washington Fund 05/03/93 17.96% 4.31%
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one-, five- or
ten-year periods at the end of the one-, five- or ten-
year periods (or fractional portion thereof)
As discussed in the Prospectus, the Fund may quote total rates of return for
each class in addition to the average annual total return for each class.
These quotations are computed in the same manner as the average annual
compounded rates, except they will be based on the actual return of a class
for a specified period rather than on the average return over one-, five- and
ten-year periods, or fractional portion thereof. The total rates of return
for Class I shares for the one-year period ended November 30, 1995, and from
inception date of each Class I shares to November 30, 1995 were as follows:
AGGREGATE ANNUAL
TOTAL RETURN
INCEPTION ONE- FROM
OF THE FUND YEAR INCEPTION
Arkansas Fund 05/10/94 15.51% 8.30%
California Fund 05/03/93 13.13% 12.64%
Hawaii Fund 02/26/92 15.71% 28.40%
Tennessee Fund 05/10/94 15.78% 10.63%
Washington Fund 05/03/93 17.96% 11.50%
CURRENT YIELD
The current yield of Class I reflects the income per share earned by each
Fund's portfolio investments and is determined by dividing the net investment
income per share of earned during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the Funds during the base period. The yield for Class I
shares for the 30-day period ended on November 30, 1995 was as follows:
Arkansas Fund 5.26%
California Fund 6.05%
Hawaii Fund 5.29%
Tennessee Fund 5.23%
Washington Fund 5.47%
This figure was obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of fee waivers and expense
reductions, if any)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
TAX EQUIVALENT YIELD
The Funds may also quote a tax equivalent yield for each class that
demonstrates the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund which invests in tax-exempt obligations. Tax
equivalent yield is computed by dividing the portion of the class' yield
(computed as indicated above) 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 tax equivalent yield for Class I shares for the 30-day period
ended on November 30, 1995 was as follows:
Arkansas Fund 9.36%
California Fund 11.25%
Hawaii Fund 9.73%
Tennessee Fund 9.21%
Washington Fund 9.06%
As of the date of this SAI, the state and the combined state and federal
income tax rates upon which tax equivalent yield quotations are based are 10%
and 45.64% for the Hawaii Fund, 11% and 46.24% for the California High Yield
Fund, 7% and 43.83% for the Arkansas Fund, and 6% and 43.22% for the
Tennessee Fund. For the Washington Fund, which currently has no state income
tax, the maximum federal tax rate of 39.6% will be used. The tax equivalent
yield quotations by the Funds will be based upon a 39.6% federal income tax
rate.
From time to time, as any changes to such rates become effective, tax
equivalent yield quotations advertised by the Funds will be updated to
reflect such changes. The Funds expect updates may be necessary as tax rates
are frequently changed by federal, state and local governments. The advantage
of tax-free investments, such as in the Funds of the Trust, will be enhanced
by any tax rate increases. Therefore, the details of specific tax increases
may be used in sales material for each Fund.
CURRENT DISTRIBUTION RATE
Current yield and tax equivalent yield ] which are calculated according to a
formula prescribed by the SEC are] not indicative of the amounts which were
or will be paid to 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 computed by dividing the
total amount of dividends per share paid by a class during the past 12 months
by a current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to the current
distribution rate of a class (calculated as indicated above). The advertised
taxable equivalent distribution rate will reflect the most current federal
and state tax rates available to a Fund. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a
fundamental change in investment policies, it might be appropriate to
annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than interest, such
as short-term capital gains and is calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One measure of volatility 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 purchase Class I shares of the Funds at
net asset value, sales literature pertaining to Class I may quote a current
distribution rate, yield, 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.
Regardless of the method used, past performance is not necessarily indicative
of future results, but is an indication of the return to shareholders only
for the limited historical period used.
The 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 Funds may satisfy your
investment objective, advertisements and other materials regarding the Funds
may discuss certain measures of performance of each class as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices,
and averages. Such comparisons may include, but are not limited to, the
following examples:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad
Index measures yield, price, and total return for Treasury, Agency,
Corporate, and Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The
Aggregate Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage, and Yankee bonds.
c) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices -
LBMBI measures yield, price and total return for the municipal bond market.
d) Bond Buyer's 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
f) Bond Buyers 40 Bond Index - an index based on the yields of 40 long-term
tax-exempt municipal bonds. Designed to be the basis for the Municipal Bond
Index in futures contracts.
g) Financial publications: The Wall Street Journal and Business Week,
Financial World, Forbes, Fortune, and Money magazines - provide performance
statistics over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term
High-Yield Index, Intermediate-Term High-Yield Index, Long-Term Utility
High-Yield Index.
i) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
j) Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is
published weekly in the Los Angeles Times and the San Francisco Chronicle.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
l) Savings & Loan Historical Interest Rates as published by the U.S. Savings
& Loan League Fact Book.
m) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
From time to time, advertisements or information for the Funds may include a
discussion of certain attributes or benefits to be derived by an investment
in the Funds. Such advertisements or information may include symbols,
headlines, or other material which highlight or summarize the information
discussed in more detail in the communication.
Advertisements or information may also compare the Funds' performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in the Funds involve the risk of
fluctuation of principal value, a risk generally not present in an investment
in a certificate of deposit issued by a bank. For example, as the general
level of interest rates rise, the value of the Funds' fixed-income
investments, as well as the value of their shares which are based upon the
value of such portfolio investments, can be expected to decrease. Conversely,
when interest rates decrease, the value of the Funds' shares can be expected
to increase. Certificates of deposit are frequently insured by an agency of
the U.S. government. An investment in the Funds is not insured by any
federal, state or private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages
is not identical to the Funds' portfolios, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their figures. In addition there can be no assurance that the Funds will
continue this performance as compared to such other averages.
OTHER FEATURES AND BENEFITS
Each of the Funds may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home,
college cost and/or other long-term goals. The Franklin College Costs Planner
may assist an investor in determining how much money must be invested on a
monthly basis in order to have a projected amount available in the future to
fund a child's college education. (Projected college cost estimates are based
upon current costs published by the College Board.) The Franklin Retirement
Planning Guide leads an investor through the steps to start a retirement
savings program. Of course, an investment in a Fund cannot guarantee that
such goals will be met.
MISCELLANEOUS INFORMATION
The 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 $135 billion in assets under management for more than 3.9 million
U.S. based mutual fund shareholder and other accounts. The Franklin Group of
Funds and the Templeton Group of Funds offer to the public 114 U.S. based
mutual funds. The Funds may identify themselves by their NASDAQ symbols or
CUSIP numbers.
Franklin is a leader in the tax-free mutual fund industry and manages more
than $41 billion in municipal bond assets for over half a million investors.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked number 2 out of 1,000 investment
advisory firms surveyed by TMS Holdings, Inc. As of November 14, 1994, this
raking remains unchanged.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past seven years.
From time to time advertisements or sales material issued by the Funds
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.
GENERAL
The Trust will amortize the organizational expenses attributable to each Fund
over a period of five years from the effective date of the registration
statement covering each Fund. New investors purchasing shares of a Fund after
the effective date of such Fund's registration statement under the Securities
Act of 1933 will be bearing such expenses during the amortization period.
The shareholders of a Delaware business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration
of Trust also provides for indemnification and reimbursement of expenses out
of Trust assets for any shareholder held personally liable for obligations of
the Trust. The Declaration of Trust provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund(s) of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding, and errors and
omissions insurance) for the protection of the Trust, its shareholders,
trustees, officers, employees and agents to cover possible tort and other
liabilities. Thus, your risk of incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its obligations.
From time to time, the number of shares of each Fund held in the "street
name" accounts of various securities dealers for the benefit of their clients
or in centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Trust, as of February 14, 1996 the
principal shareholders of the Funds, beneficial or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
ARKANSAS FUND
Franklin Resources, Inc. 238,385.908 37.36%
777 Mariners Island Blvd.
San Mateo, CA 94404
HAWAII FUND
Franklin Resources, Inc. 248,680.032 6.83%
777 Mariners Island Blvd.
San Mateo, CA 94404
Liu Chang and Lucy C.H. Chang 468,603.561 12.87%
1525 Wilder Ave. #1108
Honolulu, HI 96822
777 Mariners Island Blvd.
TENNESSEE FUND
Franklin Resources, Inc. 238,577.114 23.80%
777 Mariners Island Blvd
San Mateo, CA 94404
WASHINGTON MUNICIPAL BOND FUND
Franklin Resources, Inc. 238,385.908 38.34%
777 Mariners Island Blvd.
San Mateo, CA 94404
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.
[As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust
further provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the Fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
Fund's total assets. Thus, the risk of you incurring financial loss on
account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.]
OWNERSHIP AND AUTHORITY DISPUTES
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 Internal
Revenue Service in response to a Notice of Levy.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust for the fiscal year ended May 31, 1995, including
the auditors' report, and the unaudited Semi-Annual Report to Shareholders
for the period ended November 30, 1995, are incorporated herein by reference.
APPENDIX A -
FURTHER INFORMATION ON SPECIAL FACTORS
AFFECTING EACH STATE FUND
The following information is a summary of special factors affecting each of
the individual state Funds. It does not purport to be a complete description
of such factors and is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states and
other historically reliable sources. The Trust has not independently verified
any of this data. The market value of the shares of any Fund may fluctuate
due to factors such as changes in interest rates, matters affecting a
particular state, or for other reasons.
ARKANSAS
Arkansas has consistently maintained a balanced budget and a conservative
approach to its financial operations. Under the state's Revenue Stabilization
Act and other laws enacted in the early 1970s, all general obligation debt
must be authorized by voters, restrictions are placed on the total amount of
debt that can be issued during any two year budget cycle, and the state is
prohibited from engaging in deficit spending i.e. spending cannot exceed
revenues in any fiscal year. As a result, Arkansas has maintained one of the
lowest debt loads of the states, despite notable increases since 1990, with
debt per capita equal to $293.
During fiscal 1994, revenues collected exceeded 1993 levels by 9.3%.
Conservative estimates based on slower employment and income growth project
revenue growth of 4.6% for each of fiscal years 1995 and 1996 and 5.7% for
fiscal 1997. Through February, revenue collections for fiscal 1995 have
actually exceeded projections by 1.8%, with declines in revenues from
corporate income and alcoholic beverage taxes offset by increases in other
tax categories.
Despite the state's steady and strong economic growth, many counties in
Arkansas may face financial pressures in the coming years, as a result of the
state Supreme Court's recent ruling declaring a county's one cent sales tax
unconstitutional. The tax was found to be unconstitutional because it
exceeded the half-cent limit on general purpose sales taxes imposed by the
state's constitution. This ruling could affect approximately 63 of the
state's 75 counties which have general purpose sales taxes exceeding the
half-cent limit, including Pulaski County, the state's most populous county.
CALIFORNIA
On June 6, 1978, California voters approved Proposition 13, which added
Article XIIIA to the California Constitution. The principal thrust of Article
XIIIA is to limit the amount of ad valorem taxes on real property to one
percent of the full cash value as determined by the county assessor. The
assessed valuation of all real property may be increased, but not in excess
of two percent per year, or decreased to reflect the rate of inflation or
deflation as shown by the consumer price index. Article XIIIA requires a vote
of two thirds of the qualified electorate to impose special taxes, and
completely prohibits the imposition of any additional ad valorem, sales or
transaction tax on real property (other than ad valorem taxes to repay
general obligation bonds issued to acquire or improve real property), and
requires the approval of two-thirds of all members of the State Legislature
to change any state tax laws resulting in increased tax revenues.
On November 6, 1979, California voters approved the initiative seeking to
amend the California Constitution entitled "Limitation of Government
Appropriations" which added Article XIIIB to the California Constitution.
Under Article XIIIB state and local governmental entities have an annual
appropriations limit and may not spend certain monies which are called
appropriations subject to limitations (consisting of tax revenues, state
subventions and certain other funds) in an amount higher than the
appropriations limit. Generally, the appropriations limit is to be based on
certain 1978-79 expenditures, and is to be adjusted annually to reflect
changes in consumer prices, population and services provided by these
entities.
Decreases in state and local revenues in future fiscal years as a consequence
of these initiatives may continue to result in reductions in allocations of
state revenues to California municipal issuers or reduce the ability of such
California issuers to pay their obligations.
In its third year of economic recovery, California continues to show gradual
improvement. Although a large portion of the deficit accumulated during the
recession still remains, it the state will likely be able to retire its
outstanding short-term borrowing as scheduled in April. Its balance sheet is
still weak, but California's reliance on external cash flow has been reduced
from previous years, and in the fiscal year ended June 30, 1995, the state
produced an operating surplus of approximately $800 million.
The 1995-1996 budget, which was passed on August 3, 1995, calls for an
operating surplus of approximately $600 million. The budget relies on the
unlikely prospect that federal government will provide $500 million in new
funding for incarceration of illegal aliens and other programs, as well as
allow California to cut an additional $500 million from federally mandated
programs such as AFDC and MediCal. At the same time, the temporary top
marginal personal income tax rates have expired, bringing down such rates
from 10% and 11% to 9.3%. School funding will increase by approximately $1
billion over last year, and there will be an 8% increase in the share of the
state budget devoted to prisons.
California's long-term economic difficulties will continue for an extended
period of time despite a gradually improving economy. K-12 education and
prison costs are expected to rise more rapidly than the overall budget, and
county governments are having difficulties resulting from the shift of
property taxes from counties to schools. Even in areas where the growth rates
appear to be decreasing, such as in health and welfare spending, it is likely
that California will encounter the same uncertainties faced by other states
as the federal government leaves more control to the states and as
California's population grows older.
Financial, economic and political factors will continue to have significant
effects on the health of the California economy. Voter initiatives have a
strong impact on the budget, and the budget process has difficulty
reconciling spending needs with a low tolerance for taxes. The constitutional
reform commission will present a final plan to address many of these issues
in January, and California's credit condition is expected to improve at a
fairly limited rate unless such a plan is adopted.
HAWAII
Hawaii has historically enjoyed a strong financial position. Past recessions
in both the U.S. and Asia, however, adversely affected the state's tourism
and construction industries, two of its largest industries, resulting in
substantial reductions in economic growth and tax revenues. Economic recovery
has been slow, creating financial pressures on the state's fiscal position.
Hawaii's debt levels are high and continue to grow, primarily due to the
state's role in delivering services such as education and health care. Debt
per capita is $4,150 and total debt service represents approximately 11% of
the state's operating expenditures. While debt at the state level is high,
overall debt is manageable as counties continue to have relatively low debt
burdens.
During fiscal 1994, decreased growth and tax revenues resulted in a reduction
of the state's general fund balance of approximately $25 million, although
reserves remain strong at 8% of current expenditures. Over the next several
years, fiscal pressures are expected to continue. By 1997, the general fund
balance is projected to decline to 2.5% of the state's expenditures and
spending cuts of more than $150 million will be required.
TENNESSEE
Tennessee has historically had a sound financial position, though as in many
states, the recession has had a negative impact on revenues. Although the
recession produced shortfalls in fiscal years 1991 and 1992, renewed economic
growth, increased taxes, and cost controls in fiscal 1993 generated a $132
million general fund surplus and the rainy day revenue fluctuation fund was
restored to $150 million from $75 million in 1992. For fiscal 1994, revenues
growth continued and the Rainy Day Fund has reached $150 million and it is
expected to remain at that level through the fiscal year ended 1995.
In January 1994, TennCare, the state's comprehensive health care program, was
implemented. The program is designed to restructure the health care delivery
system and extends benefits to the uninsured. It is anticipated that the
state should be able to produce sizable savings and limit the growth of
Medicaid spending. The state has received a waiver from the federal
government to be free of the requirements of the Medicaid program. The
1995-1996 budget assumes no new revenues or taxes and includes reductions in
state agency budget. Also included in the state's budget initiatives for
fiscal 1995-1996 is continued implementation of the Education Improvement Act
of 1992, which guarantees a basic level of service for all primary and
secondary school students in the state under a Basic Education Program
formula. A substantial portion of the capital outlay projects continue to be
financed on a current basis. Funds from general obligation bonds have been
used mostly for higher education and correctional facilities.
Tennessee's financial operations are considerably different than most other
states because there is no state payroll income tax. This factor, together
with the state's reliance on the sales tax for approximately 60% of general
fund receipts, exposes total state tax collections to considerably more
volatility than would otherwise be the case and, in the event of an economic
downswing, could affect the state's ability to pay principal and interest in
a timely manner.
Debt issuance is limited by statute, additional general obligation bonds may
only be issued if pledged special revenues for the preceding fiscal year are
at least 1.5 times the peak annual debt service requirements on both new and
outstanding bonds. In 1994, the debt service limit was $326.2 million and the
peak debt service was $102.4 million. Tennessee's outstanding general
obligation indebtedness is $837 million. Overall debt remains low at $633 per
capita.
WASHINGTON
During 1991, in response to economic softening, the state made downward
revisions in its economic and revenue forecasts for the 1991-93 biennium, and
enacted corresponding adjustments on the expenditure side of the budget. As a
result of the adjustments, the 1991-93 biennium closed with an ending
unreserved general fund balance of approximately $234 million, in addition to
a $100 million balance in the budget stabilization fund (or "rainy day
fund"). These balances have decreased from the beginning of the 1993-1995
biennium, when the unreserved fund balance and the rainy day fund stood at
$468 million and $260 million, respectively.
The total 1993-95 biennial general fund budget was $16.3 billion, up 6% over
the 1991-1993 biennium. On April 6, 1994, the governor signed a supplemental
budget, which included $168 million of additional spending for various
one-time items, including grants to local school districts. The state ended
the 1993-1995 biennium with $455 million in the general fund.
In November 1993, voters approved Initiative 601, which will limit state
spending increases to the average of the rate of inflation and population
growth over the previous three years beginning with the 1995-1997 biennium.
The impact of Initiative 601 is expected to be significant but manageable.
Since July 1, 1995, tax increases require a two-thirds vote of the
legislature but only up to the spending limit.
The total 1995-97 biennial general fund budget is $17.6 billion. The budget
successfully closed a gap reflecting new expenditures of approximately $2
billion necessary to keep up with growth in education enrollment, prison
populations, debt service and health care costs. The state addressed the $2
billion imbalance through a combination of expenditure reductions, program
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.
State financial performance is anticipated to be remain positive despite
continued reductions in operations at Boeing, whose employees represent about
4% of the state's employment and the 1995 implementation of Initiative 601.
The state, in response to earlier Boeing reductions, promptly lowered its
revenue forecasts and enacted a 1993-95 biennial budget aimed at enhancing
reserve levels and bringing spending and revenue back into balance.
APPENDIX B -
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
MUNICIPAL BONDS
MOODY'S INVESTORS SERVICE ("MOODY'S")
AAA: Municipal bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a large or by
an exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
CON. (-): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis condition.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION ("S&P")
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior, but also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
NOTE: The S&P ratings may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
FITCH'S INVESTORS SERVICES, INC. ("FITCH")
AAA BONDS: (highest quality) "the obligor has an extraordinary ability to pay
interest and repay principal which is unlikely to be affected by reasonably
foreseeable events."
AA BONDS: (high quality) "the obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA rated securities
or more subject to possible change over the term of the issue."
A BONDS: (good quality) "the obligor's ability to pay interest and repay
principal is strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings."
BBB BONDS: (satisfactory bonds) "the obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to weaken this ability
than bonds with higher ratings."
MUNICIPAL NOTES
MOODY'S
Moody's ratings for state, municipal, and other short-term obligations will
be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing; factors of the first importance in
long-term borrowing risk are of lesser importance in the short run. Symbols
used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER
MOODY'S
Moody's Commercial Paper ratings, which are also applicable to municipal
paper investments permitted to be made by the Trust, are opinions of the
ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
FINANCIAL STATEMENTS
FRANKLIN MUNICIPAL SECURITIES TRUST
File Nos. 33-44132 & 811-6481
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
(a) Unaudited Financial Statements incorporated herein by reference to
the Registrant's Semi-Annual Report to Shareholders dated
November 30, 1995 as filed with the SEC on Form Type N-30D on
January 26, 1996.
(i) Statement of Investments in Securities and Net Assets -
November 30, 1995 (unaudited).
(ii) Statement of Assets and Liabilities - November 30, 1995
(unaudited).
(iii)Statement of Operations - for the six months ended
November 30, 1995 (unaudited).
(iv) Statements of Changes in Net Assets - for the six months
ended November 30, 1995 (unaudited) and the year ended May
31, 1995.
(v) Notes to Financial Statement
(b) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders, dated May 31, 1995 as
filed with the SEC on Form Type N-30D on July 27, 1995.
(i) Report of Independent Auditors.
(ii) Statement of Investments in Securities and Net Assets - May
31, 1995.
(iii)Statement of Assets and Liabilities - May 31, 1995.
(iv) Statement of Operations - for the year ended May 31, 1995.
(v) Statements of Changes in Net Assets - for the years ended
May 31, 1995 and May 31, 1994.
(c) Exhibits:
The following exhibits, are incorporated by reference herewith, except
exhibits 2(ii), 5(ii), 8(iii), 8(iv), 11(i), 15(v) and 18(i) which are
attached.
(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 No. 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 No. 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 No. 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 No. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Amendment to the By-Laws dated April 19, 1994
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
N/A
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
N/A
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated February 26, 1992
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Amendment to Management Agreement between Registrant and
Franklin Advisers, Inc. dated August 1, 1995
(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 No. 33-44132 & 811-6481
Filing Date: July 31, 1995
(ii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: March 28, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof;
N/A
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
renumeration;
(i) Custodian Agreement between Registrant and Bank of America
NT & SA
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 Premier Return Fund
Filing: Post-Effective Amendment No. 54 to Registration on
Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iii)Master Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
(iv) Terminal Link Agreement between Registrant and
The Bank of New York dated February 16, 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;
N/A
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
N/A
(11) copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
registration statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
N/A
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding dated February 11, 1992 and March 6,
1992
Filing: Post-Effective Amendment No. 7 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: July 31, 1995
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
N/A
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Amended and Restated Distribution Plan dated July 1, 1993
for Franklin Washington Municipal Bond Fund
Filing: Post-Effective Amendment No. 2 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: March 3, 1993
(ii) Amended and Restated Distribution Plan dated July 1, 1993
for Franklin Hawaii Municipal Bond Fund
Filing: Post-Effective Amendment No. 3 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: April 30, 1993
(iii)Amended and Restated Distribution Plan dated July 1, 1993
for Franklin California High Yield Municipal Fund
Filing: Post-Effective Amendment No. 3 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: April 30, 1993
(iv) Amended and Restated Distribution Plan dated May 10, 1994
for Franklin Arkansas Municipal Bond Fund and Franklin
Tennessee Municipal Bond Fund
Filing: Post-Effective Amendment No. 5 to Registration
Statement of Registrant on Form N-1A
File No. 33-44132 & 811-6481
Filing Date: March 11, 1994
(v) Form of Class II Distribution Plan pursuant to Rule 12b-1 on
behalf of Franklin California High Yield Municipal Fund
(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 No. 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 No. 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 No. 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) Form of Multiclass Plan
(27) Financial Data Schedule Computation
Not Applicable
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of January 31, 1996 the number of record holders of each class of
securities of the Registrant were as follows:
Number of Recordholders
Title of Class Class I Class II
Shares of Beneficial
Interest of Franklin Municipal
Securities Trust
Franklin Hawaii Municipal Bond Fund 972 n/a
Franklin California High Yield Municipal Fund 1,782 -0-
Franklin Washington Municipal Bond Fund 143 n/a
Franklin Arkansas Municipal Bond Fund 187 n/a
Franklin Tennessee Municipal Bond Fund 140 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 Franklin Gold Fund, Franklin Premier
Return Fund, Franklin Equity Fund, AGE High Income Fund, Inc., Franklin
Custodian Funds, Inc., Franklin Money Fund, Franklin California
Tax-Free Income Fund, Inc., Franklin Federal Money Fund, Franklin
Tax-Exempt Money Fund, Franklin New York Tax-Free Income Fund, Inc.,
Franklin Federal Tax-Free Income Fund, Franklin Tax-Free Trust,
Franklin California Tax-Free Trust, Franklin New York Tax-Free Trust,
Franklin Investors Securities Trust, Institutional Fiduciary Trust,
Franklin Value Investors Trust, Franklin Tax-Advantaged International
Bond Fund, Franklin Tax-Advantaged U.S. Government Securities Fund,
Franklin Tax-Advantaged High Yield Securities Fund, Franklin Managed
Trust, Franklin Strategic Series, Franklin International Trust,
Franklin Real Estate Securities Trust, Franklin Templeton Global Trust,
Franklin Templeton Money Fund 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 Growth Fund, Inc., Templeton Income Trust, Templeton
Institutional Funds, Inc., Templeton Real Estate Securities Fund,
Templeton Smaller Companies Growth Fund, Inc., and 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 per cent 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 has duly caused this Post
Effective Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of San Mateo and
the State of California, on the 26th day of February 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 Post
Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Rupert H. Johnson, Jr.* Trustee and Principal
Rupert H. Johnson Executive Officer
Dated: February 26, 1996
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: February 26, 1996
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 26, 1996
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: February 26, 1996
Harris J. Ashton* Trustee
Harris J. Ashton Dated: February 26, 1996
Harmon E. Burns* Trustee
Harmon E. Burns Dated: February 26, 1996
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: February 26, 1996
David W. Garbellano* Trustee
David W. Garbellano Dated: February 26, 1996
Charles B. Johnson * Trustee
Charles B. Johnson Dated: February 26, 1996
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: February 26, 1996
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: February 26, 1996
Hayato Tanaka* Trustee
Hayato Tanaka Dated: February 26, 1996
*By
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 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 Attached
April 19, 1994
EX-99.B5(i) Management Agreement between *
Registrant and Franklin Advisors,
Inc. dated February 26, 1992
EX-99.B5(ii) Amendment to Management Agreement Attached
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. and securities dealers
EX-99.B8(i) Custodian Agreement between *
Registrant and Bank of America NT
& SA dated February 26, 1992
EX-99.B8(ii) Custodian Agreements between *
Registrant and Citibank Delaware
EX-99.B8(iii) Master Custody Agreement between Attached
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(iv) Terminal Link Agreement between Attached
Registrant and The Bank of New
York dated February 6, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding dated *
February 11, 1992 and March 6, 1992
EX-99B.15(i) Amended and Restated Distribution *
Plan dated July 1, 1993, for
Franklin Washington Municipal Bond
Fund
EX-99B.15(ii) Amended and Restated Distribution *
Plan dated July 1, 1993, for
Franklin Hawaii Municipal Bond Fund
EX-99B.15(iii) Amended and Restated Distribution *
Plan dated July 1, 1993 for
Franklin California High Yield
Minicipal Fund
EX-99B.15(iv) Amended and Restated Distribution *
Plan dated May 10, 1994 for
Franklin Arkansas Municipal Bond
Fund and Franklin Tennessee
Municipal Bond Fund
EX-99B.15(v) Form of Class II Distribution Plan Attached
pursuant to Rule 12b-1 on behalf
of Franklin California High Yield
Municipal Fund
EX-99B.16(i) Schedule for computation of *
performance quotation
EX-99B.17(i) Power of Attorney dated March 15, *
1995
EX-99B.17(ii) Certificate of Secretary dated *
March 15, 1995
EX-99B.18(i) Form of Multiclass Plan Attached
* Incorporated by Reference
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, Secretary of Franklin Municipal Securities Trust,
a business trust organized under the laws of the State of Delaware, do hereby
certify that the following resolution was adopted by a majority of the
trustees present at a meeting held at the offices of the trust at 777
Mariners Island Boulevard, San Mate, California, on April 19, 1994:
WHEREAS, the Board of Trustees has determined that it is advisable and
in the best interests of the shareholders of the Trust to revise the
Trust's By-Laws to specifically provide for the use of proxies which
are communicated by an electronic, telephonic, computerized or
telecommunications method;
NOW THEREFORE, BE IT RESOLVED, that Section 10 of Article II is hereby
resolved to read as follows:
"Section 10. PROXIES. Every person entitled to vote for Trustees
or on any other matter shall have the right to do so either in
person or by one or more agents. Except as otherwise provided in
the Agreement and Declaration of Trust or these By-Laws, matters
relating to the giving, voting or validity of proxies will be
governed by the Delaware General Corporation Law relating to
proxies, and Delaware judicial interpretations thereunder, as if
the Trust were a Delaware corporation and Shareholders of the
Trust were shareholders of a Delaware corporation."
IN WITNESS WHEREOF, I have subscribed my name this 27th day of October, 1994
/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
AMENDMENT TO MANAGEMENT AGREEMENT
This Amendment dated as of August 1, 1995, is to the Management
Agreement dated February 26, 1992, by and between FRANKLIN MUNICIPAL
SECURITIES TRUST, a Delaware business trust (the "Trust"), on behalf of its
series now or hereafter subject to the Management Agreement, (the "Funds"),
and FRANKLIN ADVISERS, INC., a California corporation, (the "Manager"). The
undersigned parties, intending to be legally bound, hereby agree as follows:
(1) Paragraph 4 B. is amended to read:
B. The management fee payable by a Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain cost and expenses
incurred in connection therewith as set forth in paragraph 2.B.(c) of this
Agreement. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price
of ITS services. The Manager shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of a
Fund's expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Management Agreement dated February
26, 1992, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and
year first above written.
FRANKLIN MUNICIPAL SECURITIES TRUST
By /s/ Deborah R. Gatzek
FRANKLIN ADVISERS, INC.
By /s/ Harmon E.Burns
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: Vice President
By: ______________________________
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing
to act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: ______________________
Title: ______________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________
Harmon E. Burns
Title: Vice President
By: ______________________
Deborah R. Garzek
Title: Vice President & Secretary
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Advantaged International Bond California Limited
Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund Investment
Grade Intermediate Bond
Fund Income Securities
Fund U.S. Government
Securities Fund Zero
Coupon Fund -2000 Zero
Coupon Fund -2005 Zero Coupon
Fund -2010 Adjustable U.S. Government
Fund Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity
Fund Templeton Developing
Markets Equity Fund Templeton
Global Growth Fund Global
Asset Allocation Fund Small
Cap Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Franklin Municipal Securities Trust
We consent to the incorporation by reference in Post-Effective Amendment No.
8 to the Registration Statement of Franklin Municipal Securities Trust on
Form N-1A File Nos. 33-44132 and 811-6481 of our report dated June 30, 1995
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, 1995, which is incorporated by
reference in the Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 26, 1996
Franklin Fund
Form of Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of [Directors/Trustees] of the Franklin
Fund (the "Fund") [for its series]. 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 Fund - Class I and Franklin
Fund - Class II.
2. Class I shares shall carry a front-end sales charge ranging
from
[ % - %], 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
It 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 Class I of the Fund may only be exchanged for shares
of Class I of any other fund in the Franklin/Templeton Group and
may not be exchanged into the Franklin/Templeton Money Fund I! of
the Franklin/Templeton Money Fund Trust. Shares of Class II of
the Fund may only be exchanged for shares of Class II of any
other fund in the Franklin/Templeton Group and may also be
exchanged into the Franklin/Templeton Money Fund II of the
Franklin/Templeton Money Fund Trust.
9. Each Class will vote separately with respect to the Rule 12b-1
Plan related to that Class.
10. On an ongoing basis, the [directors/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 [directors/trustees], including a majority of the
independent [directors/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 [directors/trustees] of the Fund, including a
majority of the [directors/trustees] who are not interested
persons of the Fund.
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin Gold Fund Franklin Gold Fund - Class II; 232
Franklin Equity Fund Franklin Equity Fund - Class II; 234
AGE High Income Fund, Inc. AGE High Income Fund - Class II; 205
Franklin Custodian Funds, Inc. Growth Series - Class II; 206
Utilities Series - Class II; 207
Income Series - Class II; 209
U.S. Government Securities
Series - Class II; 210
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income
Income Fund Fund -Class II; 216
Franklin Managed Trust Franklin Rising Dividends
Fund - Class II; 258
Franklin California Tax-Free Franklin California Insured Tax-Free
Trust Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Investors Securities Franklin Global Government Income
Trust
Fund - Class II; 235
Franklin Equity Income
Fund - Class II; 239
Franklin Strategic Series Franklin Global Utilities
Fund - Class II; 297
Franklin Real Estate Securities Franklin Real Estate Securities
Trust
Fund - Class II; 292
INVESTMENT COMPANY FUND AND CLASS; TITAN NUMBER
Franklin Tax-Free Franklin Alabama Tax-Free Income Fund - Class II; 264
Trust Franklin Arizona Tax-Free Income Fund - Class II; 226
Franklin Colorado Tax-Free Income Fund - Class II; 227
Franklin Connecticut Tax Free Income
Fund - Class II; 266
Franklin Florida Tax-Free Income Fund - Class II; 265
Franklin Georgia Tax-Free Income Fund - Class II; 228
Franklin High Yield Tax-Free Income Fund - Class II; 230
Franklin Insured Tax-Free Income Fund - Class II; 221
Franklin Louisiana Tax-Free Income Fund - Class II; 268
Franklin Maryland Tax-Free Income Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free Income
Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income
Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund - Class II; 260
Franklin New Jersey Tax-Free Income
Fund - Class II; 271
Franklin North Carolina Tax-Free Income
Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income
Fund - Class II; 222
Franklin Oregon Tax-Free Income Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income
Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income
Fund - Class II; 223
Franklin Texas Tax-Free Income Fund - Class II; 262
Franklin Virginia Tax-Free Income Fund - Class II; 263
