As filed with the Securities and Exchange Commission on September 28, 2000.
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. 15 (x)
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 (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 (650) 312-2000
--------------
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
-----------------------------------------------------------------
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on October 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date), pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND - CLASS A, B & C
FRANKLIN TENNESSEE MUNICIPAL BOND FUND - CLASS A
INVESTMENT STRATEGY
TAX-FREE INCOME
OCTOBER 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Franklin California High Yield Municipal Fund
13 Franklin Tennessee Municipal Bond Fund
22 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
24 Choosing a Share Class
28 Buying Shares
31 Investor Services
34 Selling Shares
36 Account Policies
39 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
--------------------
GOALS The Fund's principal investment goal is to provide investors with a high
level of income exempt from federal and California personal income taxes. Its
secondary goal is capital appreciation to the extent possible and consistent
with its principal investment goal.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests
predominately in California municipal securities whose interest is free from
regular federal income taxes and from California personal income taxes. Although
the Fund tries to invest all of its assets in securities whose interest is free
from regular federal and California personal income taxes, it is possible,
although not anticipated, that a significant amount of its assets may be in
securities that pay taxable interest. The Fund also may have up to 100% of its
assets in securities that pay interest subject to the federal alternative
minimum tax.
[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public and private projects. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (principal) be repaid at maturity.
[End callout]
The Fund may invest in securities rated in any rating category by U.S.
nationally recognized rating services, including securities rated below
investment grade (or comparable unrated securities).
The manager selects securities that it believes will provide the best balance
between risk and return within the Fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
Fund's portfolio for income purposes, rather than trading securities for capital
gains, although the manager may sell a security at any time if it believes it
could help the Fund meet its goals. The manager may consider existing market
conditions, the availability of lower-rated securities, and whether the
difference in yields between higher- and lower-rated securities justifies the
higher risk of lower-rated securities when selecting securities for the Fund's
portfolio. Thus, there may be times when the Fund has a majority of its
investments in securities that are considered investment grade.
The Fund may invest in municipal lease obligations, which generally are issued
to finance the purchase of public property. The property is leased to a state or
local government and the lease payments are used to pay the interest on the
obligations. These differ from other municipal securities because the money to
make the lease payments must be set aside each year or the lease can be
cancelled without penalty. If this happens, investors who own the obligations
may not be paid. The Fund also may invest up to 35% of its assets in municipal
securities issued by U.S. territories.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, the
Fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
----------
INCOME Since the Fund can only distribute what it earns, the Fund's
distributions to shareholders may decline when interest rates fall.
CREDIT An issuer of municipal securities may be unable to make interest payments
and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact Fund
performance.
Many of the Fund's portfolio securities may be supported by credit enhancements,
which may be provided by either U.S. or foreign banks and insurance companies.
These securities have the credit risk of the entity providing the credit
support. Credit support provided by a foreign bank or insurance company may be
less certain because of the possibility of adverse foreign economic, political
or legal developments that may affect the ability of that entity to meet its
obligations. To the extent the Fund holds insured securities, a change in the
credit rating of any one or more of the municipal bond insurers that insure
securities in the Fund's portfolio may affect the value of the securities they
insure, the Fund's share price and Fund performance. The Fund might also be
adversely impacted by the inability of an insurer to meet its insurance
obligations.
LOWER-RATED SECURITIES. Securities rated below the top four ratings generally
have more credit risk than higher-rated securities. The Fund may invest up to
100% of its assets in lower-rated securities.
The risk of default or price changes due to changes in the issuer's credit
quality is greater with lower-rated securities. Issuers of lower-rated
securities are typically in weaker financial health than issuers of higher-rated
securities, and their ability to make interest payments or repay principal is
less certain. These issuers also are more likely to encounter financial
difficulties and to be materially affected by these difficulties when they
encounter them. The market price of lower-rated securities may fluctuate more
than higher-rated securities and may decline significantly in periods of general
or regional economic difficulty. Lower-rated securities also may be less liquid
than higher-rated securities.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the Fund's distributions, the Fund's yield, and the value of your investment in
the Fund will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may be prepaid (called) before maturity. Securities
are more likely to be called when interest rates are falling, because the issuer
can issue new securities with lower interest payments. If a security is called,
the Fund may have to replace it with a lower-yielding security. At any time, the
Fund may have a large amount of its assets invested in municipal securities
subject to call risk. A call of some or all of these securities may lower the
Fund's income and yield and its distributions to shareholders.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.
The Fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.
DIVERSIFICATION The Fund is a non-diversified fund. It may invest a greater
portion of its assets in the municipal securities of one issuer than a
diversified fund. The Fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities, which may
result in greater fluctuation in the value of the Fund's shares. The Fund,
however, intends to meet certain tax diversification requirements.
CALIFORNIA Since the Fund invests heavily in California municipal securities,
events in California are likely to affect the Fund's investments and its
performance. These events may include economic or political policy changes, tax
base erosion, state constitutional limits on tax increases, budget deficits and
other financial difficulties, and changes in the credit ratings assigned to
California's municipal issuers.
A negative change in any one of these or other areas could affect the ability of
California's municipal issuers to meet their obligations. In recent years,
certain issuers in California have experienced financial difficulties, such as
the 1994 bankruptcy of Orange County. It is important to remember that economic,
budget and other conditions within California are unpredictable and can change
at any time. The Fund may involve more risk than an investment in a fund that
does not focus on securities of a single state.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be issued
on a when-issued or delayed delivery basis, where payment and delivery take
place at a future date. Since the market price of the security may fluctuate
during the time before payment and delivery, the Fund assumes the risk that the
value of the security at delivery may be more or less than the purchase price.
U.S. TERRITORIES As with California municipal securities, events in any of the
territories where the Fund is invested may affect the Fund's investments and its
performance.
More detailed information about the Fund, its policies and risks and about
municipal securities held by the Fund can be found in the Fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
-----------
This bar chart and table show the volatility of the Fund's returns, which is one
indicator of the risks of investing in the Fund. The bar chart shows changes in
the Fund's returns from year to year over the past 6 calendar years. The table
shows how the Fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
[Insert bar graph]
CLASS A ANNUAL TOTAL RETURNS/1
-6.07 18.96% 6.17% 11.71% 7.35% -6.68%
----------------------------------------------------------------------------
94 95 96 97 98 99
Year
[Begin callout]
BEST QUARTER:
Q1 '95
8.28%
WORST QUARTER:
Q1 '94
-4.86%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (5/3/93)
----------------------------------------------------------------------------
Franklin California High Yield
Municipal Fund - Class A/2 -10.65% 6.23% 4.70%
Lehman Brothers Municipal Bond Index/3 -2.06% 6.91% 5.40%
SINCE
INCEPTION
1 YEAR (5/1/96)
----------------------------------------------------------------------------
Franklin California High Yield
Municipal Fund - Class C/2 -8.91% 4.39%
Lehman Brothers Municipal Bond Index/3 -2.06% 5.27%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of June 30, 2000, the Fund's year-to-date return was 3.72% for Class A.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers Municipal
Bond Index includes investment grade bonds issued within the last five years as
part of a deal of over $50 million and with a maturity of at least two years. It
includes reinvested interest. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B/1 CLASS C
-------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge (load) None/2 4.00%/3 0.99%/4
Please see "Choosing a Share Class" on page 24 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B/1 CLASS C
-------------------------------------------------------------------------------
Management fees/5 0.49% 0.49% 0.49%
Distribution and service
(12b-1) fees 0.10% 0.65% 0.65%
Other expenses 0.07% 0.07% 0.07%
-----------------------------------
Total annual Fund operating expenses/5 0.66% 1.21% 1.21%
===================================
1. The Fund began offering Class B shares on February 1, 2000. Annual Fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 24).
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended May 31, 2000, the manager had agreed in advance to
limit its management fees. With this reduction, management fees were 0.32% and
total annual Fund operating expenses were 0.49% for Class A, 1.02% for Class B
and 1.04% for Class C. The manager may end this arrangement at any time upon
notice to the Fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $490/1 $627 $777 $1,213
CLASS B $523 $684 $865 $1,313/2
CLASS C $321 $480 $758 $1,551
If you do not sell your shares:
CLASS B $123 $384 $665 $1,313/2
CLASS C $222 $480 $758 $1,551
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
----------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Fund's investment manager. Together, Advisers and its affiliates
manage over $229 billion in assets.
The team responsible for the Fund's management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Fund since its
inception. She is the co-Director of Franklin's Municipal Bond Department. She
joined Franklin Templeton Investments in 1986.
BERNARD SCHROER, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Schroer has been an analyst or portfolio manager of the Fund since its
inception. He joined Franklin Templeton Investments in 1987.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Fund since its
inception. He joined Franklin Templeton Investments in 1989.
The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year
ended May 31, 2000, management fees, before any advance waiver, were 0.49% of
the Fund's average net assets. Under an agreement by the manager to limit its
fees, the Fund paid 0.32% of its average net assets to the manager. The manager
may end this arrangement at any time upon notice to the Fund's Board of
Trustees.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the Fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED MAY 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 10.60 10.65 10.10 9.81 9.93
beginning of year
-----------------------------------------------
Net investment income/3 .56 .57 .62 .63 .64
Net realized and
unrealized gains (losses) (1.08) (.04) .55 .29 (.10)
-----------------------------------------------
Total from investment (.52) .53 1.17 .92 .54
operations
-----------------------------------------------
Distributions from net
investment income (.56)/7 (.57) (.62) (.63)/5 (.66)
In excess of net - (.01) - - -
investment income
-----------------------------------------------
Total distributions (.56) (.58) (.62) (.63) (.66)
-----------------------------------------------
Net asset value, end of 9.52 10.60 10.65 10.10 9.81
year
-----------------------------------------------
Total return (%)/4 (4.88) 5.07 11.78 9.64 5.55
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 464,423 583,752 412,211 213,396 118,313
($ x 1,000)
Ratios to average net
assets: (%)
Expenses .49 .44 .35 .34 .35
Expenses excluding
waiver and
payments by affiliate .66 .71 .69 .75 .81
Net investment income 5.70 5.22 5.81 6.24 6.49
Portfolio turnover rate 47.45 14.31 37.75 33.79 28.02
(%)
YEAR ENDED
CLASS B MAY 31, 2000/1
--------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 9.34
--------------------------------------
Net investment income/3 .17
Net realized and unrealized .20
gains (losses)
--------------------------------------
Total from investment operations .37
--------------------------------------
Distributions from net
investment income (.17)/8
--------------------------------------
Net asset value, end of year 9.54
--------------------------------------
Total return (%)/4 4.00
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 808
Ratios to average net assets: (%)
Expenses 1.02/6
Expenses excluding waiver and
payments by affiliate 1.19/6
Net investment income 5.33/6
Portfolio turnover rate (%) 47.45
CLASS C YEAR ENDED MAY 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996/2
--------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.63 10.68 10.12 9.82 9.82
-----------------------------------------------
Net investment income/3 .51 .51 .56 .57 .05
Net realized and
unrealized
gains (losses) (1.08) (.04) .56 .30 -
-----------------------------------------------
Total from investment
operations (.57) .47 1.12 .87 .05
-----------------------------------------------
Distributions from net
investment income (.51)/7 (.51) (.56) (.57)/5 (.05)
In excess of net
investment income - (.01) - - -
-----------------------------------------------
Total distributions (.51) (.52) (.56) (.57) (.05)
-----------------------------------------------
Net asset value, end of
year 9.55 10.63 10.68 10.12 9.82
-----------------------------------------------
Total return (%)/4 (5.39) 4.48 11.30 9.08 .54
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 64,890 78,338 40,363 10,624 212
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.04 .99 .90 .90 .91/6
Expenses excluding
waiver and
payments by affiliate 1.21 1.26 1.24 1.31 1.81/6
Net investment income 5.15 4.66 5.23 5.68 5.73/6
Portfolio turnover rate (%) 47.45 14.31 37.75 33.79 28.02
1. For the period February 1, 2000 (effective date for Class B) to May 31, 2000.
2. For the period May 1, 1996 (effective date for Class C) to May 31, 1996.
3. Based on average shares outstanding effective year ended May 31, 2000.
4. Total return does not include sales charges, and is not annualized.
5. Includes distributions in excess of net investment income in the amount of
$.001.
6. Annualized.
7. Includes distributions in excess of net investment income in the amount of
$.002.
8. Included distributions in excess of net investment income in the amount of
$.0004.
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
-------------------
GOAL The Fund's investment goal is to maximize income exempt from federal income
taxes and from the personal income taxes for resident shareholders of Tennessee
to the extent consistent with prudent investing and the preservation of
shareholders' capital.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests
predominately in investment grade Tennessee municipal securities whose interest
is free from regular federal income taxes and from Tennessee personal income
taxes. Although the Fund tries to invest all of its assets in securities whose
interest is free from regular federal and Tennessee personal income taxes, it is
possible, although not anticipated, that a significant amount of its assets may
be in securities that pay taxable interest. The Fund also may have up to 100% of
its assets in securities that pay interest subject to the federal alternative
minimum tax.
[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public and private projects. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (principal) be repaid at maturity.
[End callout]
The Fund only buys securities rated in the top four ratings by U.S. nationally
recognized rating services (or comparable unrated securities). The manager
selects securities that it believes will provide the best balance between risk
and return within the Fund's range of allowable investments and typically uses a
buy and hold strategy. This means it holds securities in the Fund's portfolio
for income purposes, rather than trading securities for capital gains, although
the manager may sell a security at any time if it believes it could help the
Fund meet its goal.
The Fund may invest in municipal lease obligations, which generally are issued
to finance the purchase of public property. The property is leased to a state or
local government and the lease payments are used to pay the interest on the
obligations. These differ from other municipal securities because the money to
make the lease payments must be set aside each year or the lease can be
cancelled without penalty. If this happens, investors who own the obligations
may not be paid. The Fund also may invest up to 35% of its assets in municipal
securities issued by U.S. territories.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, the
Fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
----------
INCOME Since the Fund can only distribute what it earns, the Fund's
distributions to shareholders may decline when interest rates fall.
CREDIT An issuer of municipal securities may be unable to make interest payments
and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact Fund
performance.
Many of the Fund's portfolio securities may be supported by credit enhancements,
which may be provided by either U.S. or foreign banks and insurance companies.
These securities have the credit risk of the entity providing the credit
support. Credit support provided by a foreign bank or insurance company may be
less certain because of the possibility of adverse foreign economic, political
or legal developments that may affect the ability of that entity to meet its
obligations. To the extent the Fund holds insured securities, a change in the
credit rating of any one or more of the municipal bond insurers that insure
securities in the Fund's portfolio may affect the value of the securities they
insure, the Fund's share price and Fund performance. The Fund might also be
adversely impacted by the inability of an insurer to meet its insurance
obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the Fund's distributions, the Fund's yield, and the value of your investment in
the Fund will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may be prepaid (called) before maturity. Securities
are more likely to be called when interest rates are falling, because the issuer
can issue new securities with lower interest payments. If a security is called,
the Fund may have to replace it with a lower-yielding security. At any time, the
Fund may have a large amount of its assets invested in municipal securities
subject to call risk. A call of some or all of these securities may lower the
Fund's income and yield and its distributions to shareholders.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.
The Fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.
DIVERSIFICATION The Fund is a non-diversified fund. It may invest a greater
portion of its assets in the municipal securities of one issuer than a
diversified fund. The Fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities, which may
result in greater fluctuation in the value of the Fund's shares. The Fund,
however, intends to meet certain tax diversification requirements.
TENNESSEE Since the Fund invests heavily in Tennessee municipal securities,
events in Tennessee are likely to affect the Fund's investments and its
performance. These events may include economic or political policy changes, tax
base erosion, state constitutional limits on tax increases, budget deficits and
other financial difficulties, and changes in the credit ratings assigned to
Tennessee's municipal issuers. Tennessee's economy and finances may be
especially vulnerable to changes in the performance of the financial services
sector, which historically has been volatile.
A negative change in any one of these or other areas could affect the ability of
Tennessee's municipal issuers to meet their obligations. It is important to
remember that economic, budget and other conditions within Tennessee are
unpredictable and can change at any time. The Fund may involve more risk than an
investment in a fund that does not focus on securities of a single state.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be issued
on a when-issued or delayed delivery basis, where payment and delivery take
place at a future date. Since the market price of the security may fluctuate
during the time before payment and delivery, the Fund assumes the risk that the
value of the security at delivery may be more or less than the purchase price.
U.S. TERRITORIES As with Tennessee municipal securities, events in any of the
territories where the Fund is invested may affect the Fund's investments and its
performance.
More detailed information about the Fund, its policies and risks and about
municipal securities held by the Fund can be found in the Fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
-----------
This bar chart and table show the volatility of the Fund's returns, which is one
indicator of the risks of investing in the Fund. The bar chart shows changes in
the Fund's returns from year to year over the past 5 calendar years. The table
shows how the Fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
[Insert bar graph]
ANNUAL TOTAL RETURNS/1
18.38% 9.57% 5.88% 6.62% -6.40%
------------------------------------------------------------
95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95
7.98%
WORST QUARTER:
Q1 '97
-4.48%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (5/10/94)
-----------------------------------------------------------------------------
Franklin Tennessee Municipal Bond Fund/2 -10.41% 5.59% 4.72%
Lehman Brothers Municipal Bond Index/3 -2.06% 6.91% 5.96%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of June 30, 2000, the Fund's year-to-date return was 4.30%.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers Municipal
Bond Index includes investment grade bonds issued within the last five years as
part of a deal of over $50 million and with a maturity of at least two years. It
includes reinvested interest. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a percentage of
offering price 4.25%
Load imposed on purchases 4.25%
Maximum deferred sales charge (load) None/1
Please see "Sales Charges" on page 24 for an explanation of how and when these
sales charges apply.
Annual Fund Operating Expenses (expenses deducted from Fund assets)
Management fees/2 0.63%
Distribution and service
(12b-1) fees 0.10%
Other expenses 0.08%
------------------------
Total annual Fund operating expenses/2 0.81%
========================
1. Except for investments of $1 million or more (see page 24).
2. For the fiscal year ended May 31, 2000, the manager had agreed in advance to
limit its management fees. With this reduction, management fees were 0.22% and
total annual Fund operating expenses were 0.40%. The manager may end this
arrangement at any time upon notice to the Fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The Fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------
$504/1 $673 $856 $1,384
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
----------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Fund's investment manager. Together, Advisers and its affiliates
manage over $229 billion in assets.
The team responsible for the Fund's management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Fund since its
inception. She is the co-Director of Franklin's Municipal Bond Department. She
joined Franklin Templeton Investments in 1986.
FRANCISCO RIVERA, PORTFOLIO MANAGER OF ADVISERS
Mr. Rivera has been an analyst or portfolio manager of the Fund since 1996. He
joined Franklin Templeton Investments in 1994.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Fund since its
inception. He joined Franklin Templeton Investments in 1989.
The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year
ended May 31, 2000, management fees, before any advance waiver, were 0.63% of
the Fund's average net assets. Under an agreement by the manager to limit its
fees, the Fund paid 0.22% of its average net assets to the manager. The manager
may end this arrangement at any time upon notice to the Fund's Board of
Trustees.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
--------------------
This table presents the Fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED MAY 31,
------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.16 11.27 10.71 10.40 10.53
------------------------------------------------
Net investment income/1 .56 .55 .57 .58 .56
Net realized and
unrealized
gains (losses) (1.15) (.08) .56 .33 (.09)
------------------------------------------------
Total from investment
operations (.59) .47 1.13 .91 .47
Distributions from net
investment income (.55) (.55) (.57) (.60) (.60)
Distributions from net
realized gains - (.03) - - -
------------------------------------------------
Total distributions (.55) (.58) (.57) (.60) (.60)
------------------------------------------------
Net asset value, end of
year 10.02 11.16 11.27 10.71 10.40
------------------------------------------------
Total return (%)/2 (5.30) 4.19 10.75 8.95 4.50
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 63,742 77,117 44,526 26,708 13,956
($ x 1,000)
Ratios to average net
assets: (%)
Expenses .40 .40 .40 .40 .33
Expenses excluding
waiver and
payments by affiliates .81 .81 .81 .84 .91
Net investment income 5.36 4.88 5.12 5.51 5.67
Portfolio turnover rate (%) 29.94 13.39 37.67 27.60 27.23
1. Based on average shares outstanding effective year ended May 31, 2000.
2. Total return does not include sales charges.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN DISTRIBUTIONS Each Fund declares dividends daily from
its net investment income and pays them monthly on or about the 20th day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
at least annually. The amount of these distributions will vary and there is no
guarantee the Fund will pay dividends.
TAX CONSIDERATIONS Fund distributions will consist primarily of exempt-interest
dividends from interest earned on municipal securities. In general,
exempt-interest dividends are exempt from federal income tax. Each Fund,
however, may invest a portion of its assets in securities that pay income that
is not tax-exempt. Fund distributions from such income are taxable to you as
ordinary income. Any capital gains the Fund distributes are taxable to you as
long-term capital gains no matter how long you have owned your shares.
Distributions of ordinary income or capital gains are taxable whether you
reinvest your distributions in additional Fund shares or receive them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the Fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the Fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The Fund may
invest a portion of its assets in private activity bonds. The income from these
bonds is a preference item when determining your alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, generally are exempt from that state's
personal income tax. Investments in municipal securities of other states
generally do not qualify for tax-free treatment.
Distributions of ordinary income and capital gains, and gains from the sale or
exchange of your Fund shares generally will be subject to state and local taxes.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in a Fund.
Your Account
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
----------------------
Each class of the California High Yield Fund has its own sales charge and
expense structure, allowing you to choose the class that best meets your
situation. Your investment representative can help you decide. The Tennessee
Fund only offers Class A shares.
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 4.25% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
The California High Yield Fund began offering Class B shares on February 1,
2000.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
-------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 27), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page 26).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows each Fund to pay distribution fees of up
to 0.15% per year (although each Fund is currently only reimbursing up to 0.10%)
to those who sell and distribute Class A shares and provide other services to
shareholders. Because these fees are paid out of Class A's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B - CALIFORNIA HIGH YIELD FUND
IF YOU SELL YOUR SHARES THIS % IS DEDUCTED FROM
WITHIN THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
----------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page 26). After
8 years, your Class B shares automatically convert to Class A shares, lowering
your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C - CALIFORNIA HIGH YIELD FUND
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
-------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES,
SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL
EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton fund (please see page 32
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
Franklin Templeton funds to take advantage of the lower sales charges for large
purchases of Class A shares.
[Begin callout]
FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
Franklin Templeton funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class may be waived for certain redemptions and distributions. If you would like
information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. A list of
available sales charge waivers also may be found in the Statement of Additional
Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying Fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
-------------
MINIMUM INVESTMENTS
-------------------------------------------------------------------------------
INITIAL ADDITIONAL
-------------------------------------------------------------------------------
Regular accounts $1,000 $50
Automatic investment plans $50 $50
UGMA/UTMA accounts $100 $50
Broker-dealer sponsored wrap account programs $250 $50
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and their
immediate family members $100 $50
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A
FUND ELIGIBLE FOR SALE IN YOUR STATE OR
JURISDICTION.
Certain Franklin Templeton funds, like the California High Yield Fund, offer
multiple share classes not offered by the Tennessee Fund. Please note that for
selling or exchanging your shares, or for other purposes, the Tennessee Fund's
shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. For the California High Yield Fund, make sure
you indicate the share class you have chosen. If you do not indicate a class, we
will place your purchase in Class A shares. To save time, you can sign up now
for services you may want on your account by completing the appropriate sections
of the application (see "Investor Services" on page 31). For example, if you
would like to link one of your bank accounts to your Fund account so that you
may use electronic fund transfers to and from your bank account to buy and sell
shares, please complete the bank information section of the application. We will
keep your bank information on file for future purchases and redemptions.
BUYING SHARES
-------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNt
-------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
-------------------------------------------------------------------------------
[Insert graphic of If you have another Franklin Before requesting a
phone] Templeton fund account with telephone purchase,
your bank account please make sure we have
BY PHONE information on file, you may your bank account
open a new account by phone. information on file. If
(Up to $100,000 per we do not have this
day) To make a same day information, you will
investment, please call us need to send written
1-800/632-2301 by 1:00 p.m. Pacific time or instructions with your
the close of the New York bank's name and address,
Stock Exchange, whichever is a voided check or savings
earlier. account deposit slip, and
a signature guarantee if
the bank and Fund
accounts do not have at
least one common owner.
To make a same day
investment, please call us
by 1:00 p.m. Pacific time or
the close of the New York
Stock Exchange, whichever is
earlier.
-------------------------------------------------------------------------------
Make your check payable to Make your check payable
[Insert graphic of the Fund. to the Fund. Include your
envelope] account number on the
Mail the check and your check.
BY MAIL signed application to
Investor Services. Fill out the deposit slip
from your account
statement. If you do not
have a slip, include a
note with your name, the
Fund name, and your
account number.
Mail the check and deposit
slip or note to Investor
Services.
-------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call
BY WIRE Investor Services. Please us by 1:00 p.m. Pacific
include the wire control time and make sure your
1-800/632-2301 number or your new account wire arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call u
by 1:00 p.m. Pacific time
and make sure your wire
arrives by 3:00 p.m.
-------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services
two arrows pointing the number below, or send at the number below or
in opposite signed written instructions. our automated TeleFACTS
directions] The TeleFACTS system cannot system, or send signed
be used to open a new written instructions.
BY EXCHANGE account.
(Please see page 32 for
(Please see page 32 for information on exchanges.)
TeleFACTS(R) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
-------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
-----------------
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a Fund by automatically transferring money from your checking or savings account
each month to buy shares. To sign up, complete the appropriate section of your
account application and mail it to Investor Services. If you are opening a new
account, please include the minimum initial investment of $50 with your
application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a Fund automatically by
transferring money from your paycheck to the Fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a Fund in
an existing account in the same share class* of the Fund or another Franklin
Templeton fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
Fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
sell or exchange your shares and make certain other changes to your account by
phone.
For accounts with more than one registered owner, telephone privileges also
allow the Funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone purchase, exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Because excessive trading can hurt fund performance, operations and
shareholders, the Funds effective November 1, 2000 reserve the right to revise
or terminate the exchange privilege, limit the amount or number of exchanges,
reject any exchange, or restrict or refuse purchases if (i) the Funds or their
manager believes the Fund would be harmed or unable to invest effectively, or
(ii) the Fund receives or anticipates simultaneous orders that may significantly
affect the Fund (please see "Market Timers" on page 37).
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into
Class A without any sales charge. Advisor Class shareholders of another Franklin
Templeton fund also may exchange into Class A without any sales charge. Advisor
Class shareholders who exchange their shares for Class A shares and later decide
they would like to exchange into another fund that offers Advisor Class may do
so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
--------------
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the Fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the Fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
SELLING SHARES
------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
------------------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
BY MAIL accounts may need to send additional documents.
Specify the Fund, the account number and the dollar value
or number of shares you wish to sell. If you own both
Class A and B shares, also specify the class of shares,
otherwise we will sell your Class A shares first. Be sure
to include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written
instructions.
------------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or less, you
phone] do not hold share certificates and you have not changed
your address by phone within the last 15 days, you can
BY PHONE sell your shares by phone.
1-800/632-2301 A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
------------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds sent
three lightning bolts] to a bank account. See the policies above for selling
shares by mail or phone.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption proceeds sent to a
bank account, please make sure we have your bank account
information on file. If we do not have this information,
you will need to send written instructions with your
bank's name and address, a voided check or savings
account deposit slip, and a signature guarantee if the
bank and Fund accounts do not have at least one common
owner.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
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[Insert graphic of Obtain a current prospectus for the fund you are
two arrows pointing considering.
in opposite
directions] Call Shareholder Services at the number below or our
automated TeleFACTS system, or send signed written
BY EXCHANGE instructions. See the policies above for selling shares
by mail or phone.
TeleFACTS(R)
1-800/247-1753 If you hold share certificates, you will need to return
(around-the-clock them to the Fund before your exchange can be processed.
access)
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FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
----------------
CALCULATING SHARE PRICE Each Fund calculates its net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each Fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
Statements and reports You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the Funds' financial reports every six months. To reduce Fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The Funds do not allow investments by Market Timers. You may be
considered a Market Timer if you have (i) requested an exchange out of any of
the Franklin Templeton funds within two weeks of an earlier exchange request out
of any fund, or (ii) exchanged shares out of any of the Franklin Templeton funds
more than twice within a rolling 90 day period, or (iii) otherwise seem to
follow a market timing pattern that may adversely affect the fund. Accounts
under common ownership or control with an account that is covered by (i), (ii),
or (iii) are also subject to these limits.
ADDITIONAL POLICIES Please note that the Funds maintain additional policies and
reserve certain rights, including:
o The Funds may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
o At any time, the Funds may change their investment minimums or waive or lower
their minimums for certain purchases.
o The Funds may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Funds reserve the right, in the
case of an emergency, to make payments in securities or other assets of the
Fund, if the payment of cash proceeds by check, wire or electronic funds
transfer would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the Funds promptly.
DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
Class A Class B Class C
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Commission (%) --- 3.00 2.00
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 3.25 --- ---
$250,000 but under $500,000 2.25 --- ---
$500,000 but under $1 million 1.85 --- ---
$1 million or more up to 0.75/1 --- ---
12B-1 FEE TO DEALER 0.10 0.15/2 0.65/3
A dealer commission of up to 1% may be paid on Class C NAV purchases. A dealer
commission of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date
of purchase. After 8 years, Class B shares convert to Class A shares and dealers
may then receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark] QUESTIONS
---------
If you have any questions about the Funds or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You also can call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
----------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
TeleFACTS(R) 1-800/247-1753 (around-the-clock access)
(automated)
For More Information
You can learn more about each Fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and Fund strategies, financial
statements, detailed performance information, portfolio holdings and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each Fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
Franklin(R)Templeton(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
franklintempleton.com
You also can obtain information about each Fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-6481 MUN P 10/00
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND - CLASS A, B & C
FRANKLIN TENNESSEE MUNICIPAL BOND FUND - CLASS A
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the Funds' prospectus. The Funds'
prospectus, dated October 1, 2000, which we may amend from time to time,
contains the basic information you should know before investing in the Funds.
You should read this SAI together with the Funds' prospectus.
The audited financial statements and auditor's report in the Trust's Annual
Report to Shareholders, for the fiscal year ended May 31, 2000, are incorporated
by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals, Strategies and Risks........................................... 2
Officers and Trustees................................................ 10
Management and Other Services....................................... 13
Portfolio Transactions............................................... 14
Distributions and Taxes.............................................. 14
Organization, Voting Rights and Principal Holders.................... 16
Buying and Selling Shares............................................ 17
Pricing Shares....................................................... 22
The Underwriter...................................................... 23
Performance.......................................................... 24
Miscellaneous Information............................................ 27
Description of Ratings............................................... 27
State Tax Treatment.................................................. 30
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
------------------------------------------------------------------------------
GOALS, STRATEGIES AND RISKS
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The California High Yield Fund's principal investment goal is to provide
investors with a high level of income exempt from federal and California
personal income taxes. Its secondary goal is capital appreciation to the extent
possible and consistent with its principal investment goal.
The Tennessee Fund's investment goal is to maximize income exempt from federal
income taxes and from the personal income taxes for resident shareholders of
Tennessee as is consistent with prudent investment management and the
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval. Of course, there is no assurance that either Fund will
meet its goal.
As fundamental policies, each Fund normally invests at least 80% of its net
assets in securities that pay interest free from regular federal income taxes.
In addition, the Tennessee Fund normally invests at least 65% of its total
assets in securities that pay interest free from Tennessee personal income
taxes. As nonfundamental policies, the California High Yield Fund normally
invests at least 65% of its total assets in securities that pay interest free
from California personal income taxes, and each Fund normally invests at least
65% of its total assets in municipal securities of its state.
Municipal securities issued by a Fund's state or that state's counties,
municipalities, authorities, agencies, or other subdivisions, as well as
qualifying municipal securities issued by U.S. territories such as Guam, Puerto
Rico, the Mariana Islands or the U.S. Virgin Islands, generally pay interest
free from federal income tax and from state personal income taxes for residents
of the Fund's state.
Each Fund tries to invest all of its assets in municipal securities whose
interest is free from regular federal income taxes and from the personal income
taxes of its state. The issuer's bond counsel generally gives the issuer an
opinion on the tax-exempt status of a municipal security when the security is
issued.
BELOW IS A DESCRIPTION OF VARIOUS TYPES OF MUNICIPAL AND OTHER SECURITIES THAT
EACH FUND MAY BUY. OTHER TYPES OF MUNICIPAL SECURITIES MAY BECOME AVAILABLE THAT
ARE SIMILAR TO THOSE DESCRIBED BELOW AND IN WHICH EACH FUND ALSO MAY INVEST, IF
CONSISTENT WITH ITS INVESTMENT GOAL AND POLICIES.
MUNICIPAL BONDS have two principal classifications: general obligation bonds
and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic security
behind general obligation bonds is the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. The taxes that can
be levied for the payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond
generally is the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. For example,
housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Many bonds
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments. Some authorities have further
security in the form of state assurances (although without obligation) to make
up deficiencies in the debt service reserve Fund.
ANTICIPATION NOTES are issued to provide interim financing of various municipal
needs in anticipation of the receipt of other sources of money for repayment of
the notes.
BOND ANTICIPATION NOTES are normally issued to provide interim financing until a
long-term bond financing can be arranged which provides the money for the
repayment of the notes.
REVENUE ANTICIPATION NOTES are issued in expectation of the receipt of revenue
sources, other than tax receipts, such as federal revenues available under the
Federal Revenue Sharing Program.
TAX ANTICIPATION NOTES are issued to finance the short-term working capital
needs of municipalities in anticipation of the receipt of various seasonal tax
revenues that are used to repay the notes. They are usually general obligations
of the issuer and are secured by the taxing power for the payment of principal
and interest.
CALLABLE BONDS Each Fund may invest in callable bonds, which allow the issuer to
repay some or all of the bonds ahead of schedule. If a bond is called, the Fund
will receive the principal amount, the accrued interest, and may receive a small
additional payment as a call premium. The manager may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the Fund's net asset value.
An issuer is more likely to call its bonds when interest rates are below the
rate at which the original bond was issued, because the issuer can issue new
bonds with lower interest payments. If a bond is called, the Fund may have to
replace it with a lower-yielding security. A call of some or all of these
securities may lower the Fund's income, its yield and its distributions to
shareholders. If the Fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the Fund also may not be
able to recover the full amount it paid for the bond. One way for the Fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific time
period, typically five to 10 years from when the bond is issued.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. Each Fund may invest in taxable commercial paper only
for temporary defensive purposes.
CONVERTIBLE AND STEP COUPON BONDS Each Fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds are zero-coupon
securities until a predetermined date, at which time they convert to a specified
coupon security. The coupon on step coupon bonds changes periodically during the
life of the security based on predetermined dates chosen when the security is
issued.
ESCROW-SECURED OR PRE-REFUNDED BONDS are created when an issuer uses the
proceeds from a new bond issue to buy high grade, interest bearing debt
securities, generally direct obligations of the U.S. government in order to
redeem (or pre-refund), before maturity, an outstanding bond issue that is not
immediately callable. These securities are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest on the pre-refunded bond. Pre-refunded bonds often receive a triple
A or equivalent rating. Because pre-refunded bonds still bear the same interest
rate, and have a very high credit quality, their price may increase. However, as
the original bond approaches its call date, the bond's price will fall to its
call price. Each Fund's manager attempts to manage the pre-refunded bonds in its
portfolio so that it sells them before this decline in price occurs.
MELLO-ROOS BONDS The California High Yield Fund may invest in Mello-Roos bonds.
Mello-Roos bonds are issued under the California Mello-Roos Community Facilities
Act to finance the building of roads, sewage treatment plants and other projects
designed to improve the infrastructure of a community. They are not rated and
are not considered obligations of the municipality.
Mello-Roos bonds are primarily secured by real estate taxes levied on property
located in the community. The timely payment of principal and interest on the
bonds depends on the property owner's continuing ability to pay the real estate
taxes. Various factors could negatively affect this ability including a
declining economy or real estate market in California.
MUNICIPAL LEASE OBLIGATIONS Each Fund may invest in municipal lease obligations.
Municipal lease obligations are created to finance the purchase of property for
public use. The property is then leased to the state or a local government and
these leases secure the municipal lease obligations. The lease payments are used
to pay the interest on the obligations. However, municipal lease obligations
differ from other municipal securities because each year the lessee's governing
body must appropriate (set aside) the money to make the lease payments. If the
money is not appropriated, the issuer or the lessee can end the lease without
penalty. If the lease is cancelled, investors who own the municipal lease
obligations may not be paid.
The Board of Trustees reviews each Fund's municipal lease obligations to try to
assure that they are liquid investments based on various factors reviewed by
each Fund's manager.
Since annual appropriations are required to make lease payments, municipal lease
obligations generally are not subject to constitutional limitations on the
issuance of debt, and may allow an issuer to increase government liabilities
beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a
municipal lease obligation than they do to curtail payments on other municipal
securities. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligations. If this happens, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligations or that the payments will continue
to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the
Tennessee Fund believes that this risk may be reduced, although not eliminated,
by its policies on the quality of municipal lease securities in which it may
invest. The California High Yield Fund may invest in municipal lease obligations
rated below investment grade.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities which are
expected to benefit the municipality and its residents, such as business,
manufacturing, housing, sports and pollution control, as well as public
facilities such as airports, mass transit systems, ports and parking. The
payment of principal and interest is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
facility or other property as security for payment.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or by agencies and
instrumentalities of the U.S. government and are backed by the full faith and
credit of the U.S. government. They include Treasury bills, notes and bonds.
VARIABLE OR FLOATING RATE SECURITIES Each Fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate). The
interest rate adjustments are designed to help stabilize the security's price.
While this feature helps protect against a decline in the security's market
price when interest rates rise, it lowers the Fund's income when interest rates
fall. Of course, the Fund's income from its variable rate investments also may
increase if interest rates rise.
Variable or floating rate securities may include a demand feature, which may be
unconditional. The demand feature allows the holder to demand prepayment of the
principal amount before maturity, generally on one to 30 days' notice. The
holder receives the principal amount plus any accrued interest either from the
issuer or by drawing on a bank letter of credit, a guarantee or insurance issued
with respect to the security. Each Fund generally uses variable or floating rate
securities as short-term investments while waiting for long-term investment
opportunities.
ZERO-COUPON AND DELAYED INTEREST SECURITIES Each Fund may invest in zero-coupon
and delayed interest securities. Zero-coupon securities make no periodic
interest payments, but are sold at a deep discount from their face value. The
buyer recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the issuer
defaults, the Fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value generally is more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, when interest rates rise, zero-coupon securities fall
more dramatically in value than bonds paying interest on a current basis. When
interest rates fall, zero-coupon securities rise more rapidly in value because
the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the Fund
to recognize income and make distributions to shareholders before it receives
any cash payments on its investment. To generate cash to satisfy distribution
requirements, the Fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of Fund shares.
IN ADDITION TO STANDARD PURCHASES AND SALES OF VARIOUS MUNICIPAL SECURITIES,
EACH FUND MAY ALSO ENGAGE IN OTHER STRATEGIES, WHICH ARE DESCRIBED BELOW. SHOULD
OTHER STRATEGIES, NOT SPECIFICALLY DESCRIBED BELOW, BECOME AVAILABLE OR
ATTRACTIVE, THE MANAGER MAY ENGAGE IN THEM SO LONG AS THEY ARE CONSISTENT WITH
EACH FUND'S GOALS AND OBJECTIVES.
CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on
the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Ratings Group (S&P(R)), often
rate municipal securities based on their analysis of the issuer's credit
quality. Most rating agencies use a descending alphabet scale to rate long-term
securities, and a descending numerical scale to rate short-term securities.
Securities in the top four ratings are "investment grade," although securities
in the fourth highest rating may have some speculative features. These ratings
are described at the end of this SAI under "Description of Ratings."
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered by
an insurance policy that guarantees the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of principal
and interest.
In addition to considering ratings in its selection of the Fund's portfolio
securities, the manager may consider, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. As discussed in the prospectus, each
Fund has limitations on the credit quality of the securities it may buy.
Securities that depend on the credit of the U.S. government are regarded as
having a triple A or equivalent rating.
As discussed in the prospectus, the Tennessee Fund has limitations on the credit
quality of the securities it may buy. However, the California High Yield Fund
has no limitations on the credit quality of the securities it may buy and may
even invest up to 5% of its net assets in defaulted securities if the manager
believes the issuer may resume making interest payments or other favorable
developments seem likely in the near future.
DIVERSIFICATION Although each Fund is a non-diversified fund, each Fund intends
to meet certain diversification requirements for tax purposes. Generally, to
meet federal tax requirements at the close of each quarter, the Fund may not
invest more than 25% of its total assets in any one issuer and, with respect to
50% of total assets, may not invest more than 5% of its total assets in any one
issuer. These limitations do not apply to U.S. government securities and may be
revised if applicable federal income tax requirements are revised.
ILLIQUID INVESTMENTS Each Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities generally are securities that cannot be
sold within seven days in the normal course of business at approximately the
amount at which the Fund has valued them.
MATURITY Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically range
from the less than one-year (short term) to 30 years (long term). In general,
securities with longer maturities are more sensitive to price changes, although
they may provide higher yields. Neither Fund has restrictions on the maturity of
the securities it may buy or on its average portfolio maturity.
PORTFOLIO TURNOVER The frequency of portfolio transactions, usually referred to
as the portfolio turnover rate, varies for each Fund from year to year,
depending on market conditions. Short-term trading increases portfolio turnover
and may increase costs. However, the execution costs for municipal securities
are substantially less than for equivalent dollar values of equity securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of a
Fund's assets in a temporary defensive manner or hold a substantial portion of
its portfolio in cash, cash equivalents or other high quality short-term
investments. Unfavorable market or economic conditions may include excessive
volatility or a prolonged general decline in the securities markets in the
securities in which the Funds invest or in the economies of the states and
territories where the Funds invest.
Temporary defensive investments may include securities that pay taxable
interest, including (i) high quality commercial paper and obligations of U.S.
banks (including commercial banks and savings and loan associations) with assets
of $1 billion or more; (ii) securities issued by or guaranteed by the full faith
and credit of the U.S. government; or (iii) municipal securities issued by a
state or local government other than the Fund's state. Each Fund also may invest
all of its assets in municipal securities issued by a U.S. territory such as
Guam, Puerto Rico, the Mariana Islands or the U.S. Virgin Islands. The manager
also may invest in these types of securities or hold cash when securities
meeting the Fund's investment criteria are unavailable or to maintain liquidity.
WHEN-ISSUED TRANSACTIONS Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to buy is made, but delivery
and payment take place at a later date. During the time between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. If the other party to the transaction fails to deliver or pay for
the security, the Fund could miss a favorable price or yield opportunity, or
could experience a loss.
When each Fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and includes the value of the security in the
calculation of its net asset value. The Fund does not believe that its net asset
value or income will be negatively affected by its purchase of municipal
securities on a when-issued basis. The Fund will not engage in when-issued
transactions for investment leverage purposes.
Although the Fund generally will buy municipal securities on a when-issued basis
with the intention of acquiring the securities, it may sell the securities
before the settlement date if it is considered advisable. When the Fund is the
buyer, it will set aside on its books cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, until payment
is made. If assets of the Fund are held in cash pending the settlement of a
purchase of securities, the Fund will not earn income on those assets.
INVESTMENT RESTRICTIONS Each Fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or
more of the Fund's shares present at a shareholder meeting if more than 50% of
the Fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
Each Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that 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 the Fund
from loaning portfolio securities to broker-dealers or other institutional
investors if at least 102% cash collateral is pledged and maintained by the
borrower, provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the Fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities, except that, in
the case of the Tennessee Fund, all or substantially all of the assets of the
Fund may be invested in another registered investment company having the same
investment goal 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 manager own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities, except that,
in the case of the Tennessee Fund, 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 goal 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 the Fund's investment
manager 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 Tennessee Fund, 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
goal 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 Tennessee Fund, all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment goal and policies as the Fund. To the extent permitted by exemptions
which may be granted under the Investment Company Act of 1940, as amended, the
Fund may invest in shares of one or more money market funds managed by the
Fund's investment manager or its affiliates.
10. Invest more than 25% of assets in securities of any industry, except that,
in the case of the Tennessee Fund, 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 goal 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.
Municipal securities issued to finance non-governmental business activities
generally are not considered 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.
Each Fund presently has the following additional restriction, which is not
fundamental and may be changed without shareholder approval. Each Fund may not
invest in real estate limited partnerships.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the Fund owns, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. If this happens, the
Fund intends to sell such investments as soon as practicable while trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the Fund makes an investment. In most cases, the Fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the Fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
IN ADDITION TO THE RISKS DESCRIBED IN THE PROSPECTUS, EACH FUND IS SUBJECT TO
VARIOUS RISKS RELATED TO MUNICIPAL ISSUERS.
STATE Since each Fund mainly invests in municipal securities of its state, its
performance is closely tied to the ability of issuers of municipal securities in
its state to continue to make principal and interest payments on their
securities. The issuers' ability to do this is in turn dependent on economic,
political and other conditions within the state. Below is a discussion of
certain conditions that may affect municipal issuers in each Fund's state. It is
not a complete analysis of every material fact that may affect the ability of
issuers of municipal securities to meet their debt obligations or the economic
or political conditions within each state and is subject to change. The
information below is based on data available to the Funds from historically
reliable sources, but the Funds have not independently verified it.
The ability of issuers of municipal issuers to continue to make principal and
interest payments is dependent in large part on their ability to raise revenues,
primarily through taxes, and to control spending. Many factors can affect the
state's revenues including the rate of population growth, unemployment rates,
personal income growth, federal aid, and the ability to attract and retain
successful businesses. A number of factors can also affect the state's spending
including current debt levels, and the existence of accumulated budget deficits.
The following provides some information on these and other factors.
CALIFORNIA. California's economy has been the largest of all the states in the
nation. Like many other states, however, California was significantly affected
by the national recession of the early 1990s, especially in the southern portion
of the state. Most of its job losses during this recession resulted from
cutbacks in defense spending and from the downturn in the construction industry.
Downsizing in the state's aerospace industry, excess office capacity, and slow
growth in California's export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in the
construction, entertainment, tourism and computer services sectors. The state's
diverse employment base has reached prerecession levels with manufacturing
accounting for 13.8% of employment (based on 1999 state figures), trade 22.8%,
services 31.3%, and government 16.0%. As a result of strong employment growth,
California's unemployment rate (5.2% for 1999) has improved substantially since
the recessionary years. However, it still remains above the national average.
Recent economic problems in Asia have adversely affected the state's high tech
manufacturing and related industries, resulting in slower growth than in
previous years. However this hasn't markedly affected the state's overall growth
due to growth in services, construction and tourism. A weakening of the
economies of California's international trade partners could have a negative
impact on the state.
During the period from 1990 to 1994, California experienced large budget
deficits due to its economic recession, as well as unrealistic budget
assumptions. School expenditures totaling $1.8 billion were recorded as "loan
assets" on the state's books to be repaid by 2002. When adjusted to account for
these loans, California's deficit balance was 10.7% of expenditures in 1992. At
the end of fiscal 1999, general fund balances were a positive $2.3 billion or
4.4% of expenditures on a GAAP basis. The state is predicting a $12 billion
surplus for FY00, which ended June 30, 2000.
The state has experienced strong growth in personal income. In 1999, personal
income grew 6.6%. The state is projecting 5.4% growth in 2000. Over the last
twenty years, the state's personal income as compared to the nation has lost
ground. The state's personal income was 118% of the national level in 1980 and
has dropped to 104% as of 1999. The level seems to have stabilized at 104%.
California's debt levels have grown in recent years. In 1990, the state's debt
per capita was below the median for all states. By 1999, debt per capita had
risen to $654, above the $540 median for all states. California's debt levels
may increase further as the state attempts to address its infrastructure needs
and school improvements.
While the state's financial performance has improved in recent years, its fiscal
operations have remained vulnerable. Increased funding for schools and
infrastructure improvements and various tax cuts have offset some of the growth
in revenues that has resulted from the improving economy. The state's budget
approval process, which requires a two-thirds legislative vote, also has
hampered the state's financial flexibility, as has its lack of a formalized
mid-year budget correction process. The state's relatively low budget reserves
and reduced flexibility make the state vulnerable to a future economic downturn.
In August 1999, S&P raised the state's general obligation bond rating to AA-
from A+ and, and in February 2000, Fitch raised the state's rating to AA from
AA-. Moody's currently has a positive outlook on the state's Aa3 bond rating.
TENNESSEE. Tennessee's economic recovery from the recession of the early 1990s
has been relatively strong. The state's economy has diversified, with growth in
the services, trade and durable manufacturing sectors offsetting losses in the
textile and apparel manufacturing industries. In 1998, manufacturing represented
21.8%, services 21.1% and trade 17.8% of the state's economic base. Despite
slower growth in recent years, growth in durable manufacturing, especially
automobile-related durable manufacturing and the corresponding attraction of
related supply companies, has helped to contribute to the state's personal
income growth with its relatively higher wages. From 1993-1998, the state's per
capita personal income grew by 5% annually, exceeding the national average. The
state's greater dependence on auto production, however, may make it more
susceptible to a downturn in the historically cyclical auto industry.
The state's financial management has been historically strong. However, the
state has exceedingly relied on one time revenue sources to balance the budget
and suffered a slight shortfall in 1999 of $12 million, which decreased the
ending fund balance to $547 million.
The state's finances have been dependent on sales and use taxes. These taxes
have been levied on a wide variety of goods and services, however, and have had
a strong, although slowing, growth trend in recent years. On the other side, the
state's main expenditures have been in the areas of education and health and
social services. The state's commitment to education may help to make the
state's workforce more attractive to prospective employers.
U.S. TERRITORIES Since each Fund may invest up to 35% of its assets in municipal
securities issued by U.S. territories, the ability of municipal issuers in U.S.
territories to continue to make principal and interest payments also may affect
the Funds' performance. As with state municipal issuers, the ability to make
these payments is dependent on economic, political and other conditions. Below
is a discussion of certain conditions within some of the territories where the
Funds may be invested. It is not a complete analysis of every material fact that
may affect the ability of issuers of U.S. territory municipal securities to meet
their debt obligations or the economic or political conditions within the
territories and is subject to change. It is based on data available to the Funds
from historically reliable sources, but it has not been independently verified
by the Funds.
PUERTO RICO. In recent years, Puerto Rico's financial performance has improved.
Overall, as of March 2000, Moody's considered Puerto Rico's outlook to be
positive. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1999 (audited) of $497
million, including an unreserved balance of $185.4 million. Between fiscal years
1993 and 1999, Puerto Rico has experienced a 4.3% drop in the unemployment rate,
a 54% increase in hotel registrations, a 31% increase in retail sales, a 76%
increase in exports, and a 22% decrease in welfare recipients.
While Puerto Rico's debt per capita levels are at the higher end of the spectrum
compared to American states, that is partly explained by the fact that Puerto
Rico generally centralizes its debt issuance at the state level. Going forward,
these debt levels may increase as Puerto Rico attempts to finance significant
capital and infrastructure improvements. Puerto Rico also will need to address
its large unfunded pension liability of more than $6 billion. S&P rates Puerto
Rico's general obligation debt at A, with a stable outlook.
Puerto Rico also faces challenges from the 1996 passage of a bill eliminating
Section 936 of the Internal Revenue Code. This section has given certain U.S.
corporations operating in Puerto Rico significant tax advantages. These
incentives have helped considerably with Puerto Rico's economic growth,
especially with the development of its manufacturing sector. U.S. firms that
have benefited from these incentives have provided a significant portion of
Puerto Rico's revenues, employment and deposits in local financial institutions.
The section 936 incentives are being phased out over a 10-year period ending in
2006. It is hoped that this long phase-out period will give Puerto Rico
sufficient time to lessen the potentially negative effects of section 936's
elimination. In the fifth year of this phase-out period, business continues to
show interest in Puerto Rico as manufacturing and services/commerce continue to
represent the largest sector of employment.
Outstanding issues relating to the potential for a transition to statehood also
may have broad implications for Puerto Rico and its financial and credit
position.
GUAM. Guam's economy has been heavily dependent on tourism. It has been
especially dependent on Japanese tourism, which has made Guam vulnerable to
fluctuations in the relationship between the U.S. dollar and the Japanese yen.
The recent Asian economic crisis and Typhoon Paka, which hit Guam in December
1997, negatively affected both tourism and other economic activities in Guam and
contributed to a decline of 1.8% in gross island product between 1997 and 1998.
In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a comprehensive
financial plan in June 1995 to help balance the budget and reduce the general
fund deficit by fiscal 1999. For fiscal 1998, however, Guam incurred a $21
million deficit and ended the year with a negative unreserved general fund
balance of $158.9 million. Another deficit is expected in 1999.
While Guam's debt burden has been manageable, Guam's ability to maintain current
debt levels may be challenged in the near future. U.S. military downsizing has
reduced the federal presence on the island and also may reduce federal support
for infrastructure projects. At the same time, Guam has faced increasing
pressure to improve its infrastructure to help generate economic development.
Overall, as of May 18, 2000, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and inability to meet the goals of the
financial plan.
MARIANA ISLANDS. The Mariana Islands became a U.S. territory in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum wage
and immigration laws in an effort to help stimulate industry and the economy.
The islands' minimum wage has been more than $2 per hour below the U.S. level
and tens of thousands of workers have emigrated from various Asian countries to
provide cheap labor for the islands' industries. Recently, the islands' tourism
and apparel industries combined to help increase gross business receipts from
$224 million in 1985 to $2.575 billion in 1997. By sector, the breakdown was
garment manufacturing 33%, tourism 23%, retail trade 18%, services 17% and other
9%. Gross business revenue tax collections totaled $68.6 million in fiscal year
1998. Also in fiscal year 1998, general fund revenues totaled $234 million while
expenditures totaled $238 million.
The population of all the islands combined was 67,212 at fiscal year end 1996
and average earnings per capita totaled $9,702. At fiscal year end 1995, the
most recent year available, unemployment among eligible labor force participants
stood at 2.3%.
U.S. VIRGIN ISLANDS. The U.S. Virgin Islands has suffered numerous years of
budget imbalances. Since fiscal 1989, the Virgin Islands has incurred budget
deficits in all but four fiscal years. As of June 30, 1999, the accumulated
deficit was close to $341 million. To help finance this deficit, the government
issued a $300 million bond, which allowed it to meet a $13 million payroll
payment and to begin to pay off the backlog of payments to vendors. The Virgin
Islands' large public sector payroll (approximately 32.8% of employment),
relatively small private sector that is dependent on tourism and related
services (21% of employment), and heavy reliance on taxes as a revenue source
(close to 97% of all revenues), together with the effects of three major
hurricanes in the past ten years, have contributed to its financial problems.
The U.S. Virgin Islands are not experiencing the record economic boom that the
mainland is. In 1999, employment decreased 1.7% following two years of minimal
growth. The unemployment rate for 1999 was 4.8%, which is the lowest level since
1993. The Virgin Islands are highly dependent on tourism, which contracted in
1999. While the islands have experienced an increase in hotel occupancy, the
majority of visitors come via cruise ships. The number of cruise ship passengers
decreased 12% in 1999, which resulted in an overall decline of 8% for tourism
for the year. A significant reason for the decrease in cruise ships was due to
the damage suffered to the docks from recent hurricanes. After Hurricane Jose in
October 1999, only 39 ships were able to dock in October compared to 65 in
October 1998.
In September 1998, the Department of Interior Office of Inspector General issued
an audit report on the Virgin Islands. It noted that while the Virgin Islands
had made improvements in its financial situation, problems remained in the areas
of overall financial management, expenditure control and revenue collections. To
help improve its financial position, the Virgin Islands has developed a
five-year economic recovery plan. Central to this plan is a reduction in
government spending. In June 1999, the governor implemented a strict hiring
freeze and mandated a 5% reduction in personnel expenditures each year through
fiscal 2004, a 50% reduction in overtime expenses, and various other cost saving
initiatives. In October, the government and the Department of Interior entered
into a Memorandum of Understanding stipulating that federal grants will be
awarded contingent on several financial performance and accountability standards
being met that will demonstrate improvement in the economic and financial
condition of the islands. Since the plan is new, it is not yet certain whether
or to what extent the plan will be successful in helping the Virgin Islands
improve its financial condition.
CREDIT (CALIFORNIA HIGH YIELD FUND ONLY) Since the California High Yield Fund
may invest in municipal securities rated below investment grade, an investment
in the Fund is subject to a higher degree of risk than an investment in a Fund
that invests primarily in higher-quality securities.
The market value of high yield, lower-quality municipal securities tends to
reflect individual developments affecting the issuer to a greater degree than
the market value of higher-quality securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality securities
also tend to be more sensitive to economic conditions than higher-quality
securities. Factors adversely affecting the market value of high yield
securities may lower the Fund's net asset value and affect its performance.
Projects financed by high yield municipal securities are often highly leveraged
and may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying these securities is generally greater
than the risk associated with higher-quality securities. For example, during an
economic downturn or a sustained period of rising interest rates, projects
financed by lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments also may be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected revenue forecasts or the unavailability of additional
financing.
The risk of loss due to default also may be considerably greater with
lower-quality securities. If the issuer of a security in the Fund's portfolio
defaults, the Fund may have unrealized losses on the security, which may lower
the Fund's net asset value. Defaulted securities tend to lose much of their
value before they default. Thus, the Fund's net asset value may be adversely
affected before an issuer defaults. In addition, the Fund may incur additional
expenses if it must try to recover principal or interest payments on a defaulted
security.
Lower-quality securities may not be as liquid as higher-quality securities.
Reduced liquidity in the secondary market may have an adverse impact on the
market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity also may make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
OFFICERS AND TRUSTEES
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The Trust has a board of trustees. The board is responsible for the overall
management of the Trust, including general supervision and review of each Fund's
investment activities. The board, in turn, elects the officers of the Trust who
are responsible for administering the Trust's day-to-day operations. The board
also monitors the California High Yield Fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (68)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Chairman of the Board, General Host Corporation
(nursery and craft centers) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin Investment Advisory Services, Inc., Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments.
S. Joseph Fortunato (68)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in Franklin Templeton
Investments.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 27 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993), General
Counsel to the United States Treasury Department (1989-1990), and Counselor to
the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Vice President,
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton
Investments.
*Rupert H. Johnson, Jr. (60)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 of the investment companies in Franklin
Templeton Investments.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Recycling (redevelopment); director or trustee, as
the case may be, of 28 of the investment companies in Franklin Templeton
Investments; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, WorldCom, Inc. (communications
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 47 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Hayato Tanaka (83)
277 Haihai Street, Hilo, HI 96720
TRUSTEE
Retired, former owner of The Jewel Box Orchids; and trustee of two of the
investment companies in Franklin Templeton Investments.
Sheila Amoroso (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Rafael R. Costas, Jr. (35)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Executive Vice President
and Director, Franklin/Templeton Investor Services, Inc.; President and Chief
Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President,
Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; Chief Financial Officer, Franklin
Advisory Services, LLC; Chairman and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be,
of 51 of the investment companies in Franklin Templeton Investments.
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Associate General Counsel, Franklin Resources, Inc.; President, Chief
Executive Officer and Director, Franklin Select Realty Trust, Property
Resources, Inc., Property Resources Equity Trust, Franklin Real Estate
Management, Inc. and Franklin Properties, Inc.; officer and director of some
of the other subsidiaries of Franklin Resources, Inc.; officer of 52 of the
investment companies in Franklin Templeton Investments; and FORMERLY,
President, Chief Executive Officer and Director, Franklin Real Estate Income
Fund and Franklin Advantage Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 52 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor
to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and
Exchange Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and
Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Charles E. Johnson (44)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.;
Director, Templeton Investment Counsel, Inc.; President, Franklin Investment
Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 32 of the investment companies in Franklin
Templeton Investments.
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the other subsidiaries of Franklin Resources, Inc. and of 29 of the
investment companies in Franklin Templeton Investments.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 52 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Thomas Walsh (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The Trust pays noninterested board members $900 per quarter plus $600 per
meeting attended. Board members who serve on the audit committee of the Trust
and other funds in Franklin Templeton Investments receive a flat fee of $2,000
per committee meeting attended, a portion of which is allocated to the Trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in Franklin Templeton Investments and may receive
fees from these funds for their services. The fees payable to certain
noninterested board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within Franklin Templeton Investments. The following table provides
the total fees paid to noninterested board members by the Trust and by Franklin
Templeton Investments.
NUMBER OF
TOTAL FEES BOARDS IN
TOTAL FEES RECEIVED FROM FRANKLIN
RECEIVED FRANKLIN TEMPLETON
FROM TEMPLETON INVESTMENTS
THE TRUST/1 INVESTMENTS/2 ON WHICH
NAME ($) ($) EACH SERVES/3
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Frank H. Abbott, III 5,799 156,060 28
Harris J. Ashton 5,977 363,165 47
S. Joseph Fortunato 5,650 363,238 49
Edith E. Holiday 7,200 237,265 27
Frank W.T. LaHaye 5,199 156,060 28
Gordon S. Macklin 5,977 363,165 47
Hayato Tanaka 6,600 7,675 2
1. For the fiscal year ended May 31, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in Franklin Templeton Investments. This number does not include the total number
of series or funds within each investment company for which the board members
are responsible. Franklin Templeton Investments currently includes 52 registered
investment companies, with approximately 157 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in Franklin Templeton
Investments for which they serve as director or trustee. No officer or board
member received any other compensation, including pension or retirement
benefits, directly or indirectly from the Trust or other funds in Franklin
Templeton Investments. Certain officers or board members who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Messrs. Abbott, Ashton, Fortunato, LaHaye and Macklin and Ms. Holiday serve on
multiple boards within Franklin Templeton Investments and historically have
followed a policy of having substantial investments in one or more of the funds
in Franklin Templeton Investments, as is consistent with their individual
financial goals. In February 1998, this policy was formalized through adoption
of a requirement that each such board member invest one-third of fees received
for serving as a director or trustee of a Templeton fund in shares of one or
more Templeton funds and one-third of fees received for serving as a director or
trustee of a Franklin fund in shares of one or more Franklin funds until the
value of such investments equals or exceeds five times the annual fees paid such
board member. Investments in the name of family members or entities controlled
by a board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each Fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for each Fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the Funds' portfolio transactions. The manager provides periodic reports
to the board, which reviews and supervises the manager's investment activities.
To protect the Funds, the manager and its officers, directors and employees are
covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the Funds. Similarly, with respect to each
Fund, the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the Funds or other
funds it manages.
The Funds, their manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for a Fund or that are currently held by a Fund, subject to certain
general restrictions and procedures. The personal securities transactions of
access persons of the Funds, their manager and principal underwriter will be
governed by the code of ethics. The code of ethics is on file with, and
available from, the U.S. Securities and Exchange Commission (SEC).
MANAGEMENT FEES Each Fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of net assets up to and including $100 million;
o 0.50 of 1% of the value of net assets over $100 million up to and
including $250 million; and
o 0.45 of 1% of the value of net assets in excess of $250 million.
The fee is computed daily according to the terms of the management agreement.
Each class of the California High Yield Fund's shares pays its proportionate
share of the fee.
For the last three fiscal years ended May 31, the Funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
------------------------
2000 1999 1998
--------------------------------------------------------------------------------
California High Yield Fund/1 1,941,308 1,485,870 607,269
Tennessee Fund/2 153,662 125,647 76,507
1. For the fiscal years ended May 31, 2000,1999 and 1998, management fees,
before any advance waiver, totaled $2,974,310, $3,022,340 and $1,729,049,
respectively. Under an agreement by the manager to limit its fees, the Fund paid
the management fees shown.
2. For the fiscal years ended May 31, 2000, 1999 and 1998, management fees,
before any advance waiver, totaled $437,846, $373,934 and $227,268,
respectively. Under an agreement by the manager to limit its fees, the Fund paid
the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each Fund. FT Services is wholly owned by Resources
and is an affiliate of the Funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each Fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended May 31, the manager paid FT Services
the following administration fees:
ADMINISTRATION FEES PAID ($)
----------------------------
2000 1999 1998
--------------------------------------------------------------------------------
California High Yield Fund/1 844,865 792,926 474,252
Tennessee Fund/2 104,794 89,766 54,548
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is each Fund's shareholder servicing agent and acts as
the Funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. Each Fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the Fund. The amount of reimbursements
for these services per benefit plan participant Fund account per year will not
exceed the per account fee payable by the Fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division,
90 Washington Street, New York, NY 10286, acts as custodian of each Fund's
securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the Funds' independent auditor. The auditor gives an opinion on the financial
statements included in the Trust's Annual Report to Shareholders and reviews the
Trust's registration statement filed with the SEC.
PORTFOLIO TRANSACTIONS
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Since most purchases by the Funds are principal transactions at net prices, the
Funds incur little or no brokerage costs. Each Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. As a general rule, the
Funds do not buy securities in underwritings where they are given no choice, or
only limited choice, in the designation of dealers to receive the commission.
The Funds seek to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the dealers
in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the Funds' officers are
satisfied that the best execution is obtained, the sale of Fund shares, as well
as shares of other funds in Franklin Templeton Investments, also may be
considered a factor in the selection of broker-dealers to execute the Funds'
portfolio transactions.
If purchases or sales of securities of the Funds and one or more other
investment companies or clients supervised by the manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the manager, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the Funds.
During the fiscal years ended May 31, 2000, 1999 and 1998, the Funds did not pay
any brokerage commissions.
As of May 31, 2000, the Funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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INCOME AND CAPITAL GAIN DISTRIBUTIONS The Funds calculate dividends and capital
gains the same way for each class. The amount of any income dividends per share
will differ, however, generally due to the difference in the distribution and
service (Rule 12b-1) fees of each class. Distributions are subject to approval
of the board. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
Each Fund declares dividends daily from its net investment income and pays them
monthly on or about the 20th day of the month. Capital gains, if any, may be
distributed at least annually. The amount of these distributions will vary and
there is no guarantee the Fund will pay dividends.
If you invest in the Fund shortly before the Fund deducts a capital gain
distribution from its net asset value, you will receive some of your investment
back in the form of a taxable distribution.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each Fund receives income generally in
the form of interest on its investments. This income, less expenses incurred in
the operation of the Fund, constitutes the Fund's net investment income from
which dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code (Code), each Fund
has qualified and continues to qualify to pay exempt-interest dividends to you.
These dividends are derived from interest income exempt from regular federal
income tax, and are not subject to regular federal income tax when they are
distributed to you. In addition, to the extent that exempt-interest dividends
are derived from interest on obligations of California (for shareholders of the
California High Yield Fund) or Tennessee (for shareholders of the Tennessee
Fund), or their political subdivisions, or from interest on qualifying U.S.
territorial obligations (including qualifying obligations of Puerto Rico, the
U.S. Virgin Islands or Guam), they also may be exempt from California's or
Tennessee's personal income taxes, respectively. California and Tennessee
generally do not grant tax-free treatment to interest on state and municipal
securities of other states.
Each Fund may earn taxable income from many sources, including on any temporary
investments, the discount from stripped obligations or their coupons, income
from securities loans or other taxable transactions, or ordinary income derived
from the sale of market discount bonds. Any Fund distributions from such income
will be taxable to you as ordinary income, whether you receive them in cash or
in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the Fund. Any net capital gains realized by the Funds generally will
be distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the Funds.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from either Fund's sale of securities held for more
than five years may be subject to a reduced tax rate.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS Each Fund will inform you of
the amount of your ordinary income dividends and capital gain distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year, including the
portion of the distributions that on average comprise taxable income or interest
income that is a tax preference item under the alternative minimum tax. If you
have not held Fund shares for a full year, the Fund may designate and distribute
to you, as taxable, tax-exempt or tax preference income, a percentage of income
that is not equal to the actual amount of such income earned during the period
of your investment in the Fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code.
Each Fund has qualified as a regulated investment company for its most recent
fiscal year, and intends to continue to qualify during the current fiscal year.
As a regulated investment company, neither Fund generally pays federal income
tax on the income and gains it distributes to you. The board reserves the right
not to maintain the qualification of either Fund as a regulated investment
company if it determines such course of action to be beneficial to shareholders.
In such case, the Fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the Fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code
requires the Funds to distribute to you by December 31 of each year, at a
minimum, the following amounts: 98% of its taxable ordinary income earned during
the calendar year; 98% of its capital gain net income earned during the twelve
month period ending October 31; and 100% of any undistributed amounts from the
prior year. The Funds intend to declare and pay these distributions in December
(or to pay them in January, in which case you must treat them as received in
December) but can give no assurances that their distributions will be sufficient
to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and state income+-
tax purposes. If you redeem your Fund shares, or exchange your fund shares for
shares of a different Franklin Templeton fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gain from the sale of Fund shares held for more than five years may be subject
to a reduced tax rate.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your Fund shares, and any remaining loss will
be treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the Fund on those shares. All or a portion of any
loss that you realize upon the redemption of your Fund shares will be disallowed
to the extent that you buy other shares in the Funds (through reinvestment of
dividends or otherwise) within 30 days before or after your share redemption.
Any loss disallowed under these rules will be added to your tax basis in the new
shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in either Fund, and
then reinvest the sales proceeds in the Fund or in another Franklin Templeton
fund within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in the Fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the Fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the income of both Funds
is derived primarily from interest rather than dividends, none of their
distributions will generally be eligible for the corporate dividends-received
deduction.
INVESTMENT IN COMPLEX SECURITIES The Funds may invest in complex securities,
including zero coupon and step-up bonds. These investments may be subject to
special tax rules that could accelerate the recognition of income to the Funds
(possibly causing the Funds to sell securities to raise the cash for necessary
distributions). These rules may affect the amount, timing or character of the
income distributed to you by the Funds.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while exempt from regular federal income tax, is a preference item for
taxpayers when determining their alternative minimum tax under the Code and
under the income tax provisions of several states. Private activity bond
interest could subject you to or increase your liability under federal and state
alternative minimum taxes, depending on your individual or corporate tax
position. Persons who are defined in the Code as substantial users (or persons
related to such users) of facilities financed by private activity bonds should
consult with their tax advisors before buying fund shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each Fund is a nondiversified series of Franklin Municipal Securities Trust (the
Trust), an open-end management investment company, commonly called a mutual
fund. The Trust was organized as a Delaware business trust on June 15, 1992, and
is registered with the SEC.
The California High Yield Fund currently offers three classes of shares, Class
A, Class B and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The California High Yield
Fund began offering Class B shares on February 1, 2000. The full title of each
class is:
o Franklin California High Yield Municipal Fund - Class A
o Franklin California High Yield Municipal Fund - Class B
o Franklin California High Yield Municipal Fund - Class C
The Tennessee Fund offers only one share class. Because its sales charge
structure and Rule 12b-1 plan are similar to those of Class A shares, shares of
the Fund are considered Class A shares for redemption, exchange and other
purposes.
The Funds may offer additional classes of shares in the future.
Shares of each class of the California High Yield Fund represent proportionate
interests in the Fund's assets. On matters that affect the Fund as a whole, each
class has the same voting and other rights and preferences as any other class.
On matters that affect only one class, only shareholders of that class may vote.
Each class votes separately on matters affecting only that class, or expressly
required to be voted on separately by state or federal law. Shares of each class
of a series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series may be offered in the future.
The Trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of September 1, 2000, the principal shareholders of the Funds, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
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CALIFORNIA HIGH YIELD FUND
Edgar A. Pash and Lucille C. Pash Class B 7
TRST Pash Family Trust DTD 08/09/1973
3271 Easter Circle
Huntington Beach, CA 92649-2811
Class B 8
Dean Witter for the Benefit of
Edwin Howard Wallace
P.O. Box 250, Church Street Station
New York, NY 10008-0250
NFSC FEBO W75-028339 Class B 6
Quentin H. Burden
Shirley J. Burden
13685 Rossmere Ct.
Saratoga, CA 95070
FISERV Securities Inc. Class B 8
FAO 38810948
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
TENNESSEE FUND
Charles Schwab & Co. Inc. Class A 5
FBO SPS Advantage
101 Montgomery St.
San Francisco, CA 94104-4122
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of September 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each Fund and
class. The board members may own shares in other funds in Franklin Templeton
Investments.
BUYING AND SELLING SHARES
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Each Fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the Fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of Fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the Fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A and
1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in Franklin Templeton funds to take advantage of the
lower sales charges for large purchases. Franklin Templeton funds include the
U.S. registered mutual funds in Franklin Templeton Investments except Franklin
Templeton Variable Insurance Products Trust and Templeton Capital Accumulator
Fund, Inc.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in Franklin
Templeton funds. You also may combine the shares of your spouse, children under
the age of 21 or grandchildren under the age of 21. If you are the sole owner of
a company, you also may add any company accounts, including retirement plan
accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with the Fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the Fund before a change in the Fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in Franklin Templeton funds acquired more than 90 days before you
filed your LOI will be counted towards the completion of the LOI, but they will
not be entitled to a retroactive reduction in the sales charge. Any redemptions
you make during the 13 month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the LOI have been
completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders who chose to reinvest
their distributions in Class A shares of the Fund before November 17, 1997,
and to Advisor Class or Class Z shareholders of a Franklin Templeton fund who
may reinvest their distributions in the Fund's Class A shares. This waiver
category also applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust. You should contact your
tax advisor for information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of Fund shares
and the CDSC holding period will begin again. We will, however, credit your
Fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments investing assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We may accept orders for these accounts by telephone
or other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on
the next business day following the order.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined the Fund is a legally permissible
investment and that can only buy Fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the Fund is permissible and suitable for you and the effect, if
any, of payments by the Fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of Franklin Templeton
Investments, and their family members, consistent with our then-current
policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each Fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each Fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
--------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the Funds'
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 0.75% on sales of $1 million to $2 million, plus
0.60% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales of
fund shares and/or total assets with Franklin Templeton Investments. The amount
of support may be affected by: total sales; net sales; levels of redemptions;
the proportion of a securities dealer's sales and marketing efforts in Franklin
Templeton Investments; a securities dealer's support of, and participation in,
Distributors' marketing programs; a securities dealer's compensation programs
for its registered representatives; and the extent of a securities dealer's
marketing programs relating to Franklin Templeton Investments. Financial support
to securities dealers may be made by payments from Distributors' resources, from
Distributors' retention of underwriting concessions and, in the case of funds
that have Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions generated
by fund portfolio transactions in accordance with the rules of the National
Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in Franklin Templeton funds, however,
are more likely to be considered. To the extent permitted by their firm's
policies and procedures, registered representatives' expenses in attending these
meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES THIS % IS DEDUCTED FROM
WITHIN THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
-------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived its
commission in connection with the purchase
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, accrued but unpaid income dividends and capital gain distributions will
be reinvested in the Fund at net asset value on the date of the exchange, and
then the entire share balance will be exchanged into the new fund. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their Fund shares under the exchange privilege, the Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
each Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment goals exist
immediately. This money will then be withdrawn from the short-term, tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of Fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. There are no service charges for establishing or maintaining a systematic
withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. When
you sell your shares under a systematic withdrawal plan, it is a taxable
transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. The Fund may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the Fund receives notification of the shareholder's
death or incapacity.
REDEMPTIONS IN KIND Each Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the Fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
Fund. In these circumstances, the securities distributed would be valued at the
price used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your Fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the Fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The Funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the Funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the Funds on behalf
of numerous beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus account, the
Fund may reimburse Investor Services an amount not to exceed the per account fee
that the Fund normally pays Investor Services. These financial institutions also
may charge a fee for their services directly to their clients.
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with the Fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
Fund at a later date. These sub-accounts may be registered either by name or
number. The Fund's investment minimums apply to each sub-account. The Fund will
send confirmation and account statements for the sub-accounts to the
institution.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the Fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the Fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
Fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
Each Fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The Funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each Fund values cash and receivables at their
realizable amounts, and records interest as accrued. Each Fund values
over-the-counter portfolio securities within the range of the most recent quoted
bid and ask prices. If portfolio securities trade both in the over-the-counter
market and on a stock exchange, each Fund values them according to the broadest
and most representative market as determined by the manager. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. In the absence of a sale or reported bid and ask prices,
information with respect to bond and note transactions, quotations from bond
dealers, market transactions in comparable securities, and various relationships
between securities are used to determine the value of municipal securities.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the close of the NYSE.
The value of these securities used in computing the NAV is determined as of such
times. Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the close of the NYSE that
will not be reflected in the computation of the NAV. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, each
Fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each Fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the Funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended May 31:
AMOUNT RECEIVED IN
TOTAL CONNECTION WITH
COMMISSIONS AMOUNT RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
-------------------------------------------------------------------------------
2000
California High 1,422,372 81,006 128,818
Yield Fund
Tennessee Fund 227,372 18,346 0
1999
California High 3,965,000 247,688 59,344
Yield Fund
Tennessee Fund 559,070 36,967 2,120
1998
California High 3,855,645 247,055 4,213
Yield Fund
Tennessee Fund 470,161 32,428 0
Distributors may be entitled to payments from the Funds under the Rule 12b-1
plans, as discussed below. Except as noted, Distributors received no other
compensation from the Funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its shareholders.
The plans are expected to, among other things, increase advertising of the Fund,
encourage sales of the Fund and service to its shareholders, and increase or
maintain assets of the Fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the Fund is useful in managing the Fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates and who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." The 12b-1 fees charged to each class are based only on the fees
attributable to that particular class.
THE CLASS A PLAN. Each Fund may pay up to 0.15% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows each Fund
to reimburse Distributors for eligible expenses that Distributors has shown it
has incurred. Each Fund will not reimburse more than the maximum amount allowed
under the plan.
For the fiscal year ended May 31, 2000, the amounts paid by the Funds pursuant
to the plan were:
CALIFORNIA
HIGH YIELD TENNESSEE
FUND FUND
($) ($)
------------------------------------------------------------------
Advertising 29,681 2,460
Printing and mailing prospectuses 7,918 2,227
other than to current shareholders
Payments to underwriters 13,992 1,738
Payments to broker-dealers 449,876 59,910
Other 40,191 4,818
--------------------------
Total 541,658 71,153
--------------------------
THE CLASS B AND C PLANS. The California High Yield Fund pays Distributors up to
0.65% per year of the class's average daily net assets, out of which 0.15% may
be paid for services to the shareholders (service fees). The Class B and C plans
also may be used to pay Distributors for advancing commissions to securities
dealers with respect to the initial sale of Class B and C shares. Class B plan
fees payable to Distributors are used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commissions to securities dealers. Franklin Resources owns a
minority interest in one of the third party financing entities.
The Class B and C plans are compensation plans. They allow the California High
Yield Fund to pay a fee to Distributors that may be more than the eligible
expenses Distributors has incurred at the time of the payment. Distributors
must, however, demonstrate to the board that it has spent or has near-term plans
to spend the amount received on eligible expenses. The Fund will not pay more
than the maximum amount allowed under the plans.
Under the Class B plan, the amounts paid by the California High Yield Fund
pursuant to the plan for the fiscal year ended May 31, 2000, were:
($)
-----------------------------------------------------
Advertising 3
Printing and mailing prospectuses
other than to current shareholders 0
Payments to underwriters 1
Payments to broker-dealers 235
Other 8
-------------
Total 247
-------------
Under the Class C plan, the amounts paid by the California High Yield Fund
pursuant to the plan for the fiscal year ended May 31, 2000, were:
($)
-----------------------------------------------------
Advertising 15,372
Printing and mailing prospectuses 3,204
other than to current shareholders
Payments to underwriters 8,075
Payments to broker-dealers 431,676
Other 19,102
-------------
Total 477,429
-------------
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, the manager or Distributors or other parties on behalf of the
Fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of Fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, then such payments shall be deemed to have been made pursuant
to the plan.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plans because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plans for administrative
servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the Funds to
compute or express performance follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge reflected
in each quotation is a one time fee charged on all direct purchases, which will
have its greatest impact during the early stages of your investment. This charge
will affect actual performance less the longer you retain your investment in the
Fund. The average annual total returns for the indicated periods ended May 31,
2000, were:
SINCE
INCEPTION INCEPTION
CLASS A DATE 1 YEAR (%) 5 YEARS (%) (%)
----------------------------------------------------------------------------
California High Yield 05/03/93 -8.92 4.36 4.75
Fund
Tennessee Fund 05/10/94 -9.36 3.56 4.60
SINCE
INCEPTION 1 YEAR INCEPTION
CLASS C DATE (%) (%)
-----------------------------------------------------------------
California High Yield 05/01/96 -7.25 4.45
Fund
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended May 31, 2000, were:
SINCE
INCEPTION INCEPTION
CLASS A DATE 1 YEAR (%) 5 YEARS (%) (%)
-----------------------------------------------------------------------------
California High Yield 05/03/93 -8.92 23.80 38.96
Fund
Tennessee Fund 05/10/94 -9.36 19.09 31.28
SINCE
INCEPTION INCEPTION
CLASS B DATE (%)
-----------------------------------------------------------------
California High Yield 02/01/00 0.00
Fund
INCEPTION SINCE
CLASS C DATE 1 YEAR (%) INCEPTION (%)
-----------------------------------------------------------------
California High Yield 05/01/96 -7.25 19.45
Fund
CURRENT YIELD Current yield shows the income per share earned by a Fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the base
period. The yields for the 30-day period ended May 31, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
--------------------------------------------------------------------------
California High Yield Fund 5.79 5.52 5.44
Tennessee Fund 5.47 - -
The following SEC formula was used to calculate these figures:
6
Yield = 2 [(A-B + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
TAXABLE-EQUIVALENT YIELD Each Fund also may quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by dividing
the portion of the yield that is tax-exempt by one minus the highest applicable
combined federal and state income tax rate and adding the product to the portion
of the yield that is not tax-exempt, if any. The taxable-equivalent yields for
the 30-day period ended May 31, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
--------------------------------------------------------------------------
California High Yield Fund 10.57 10.08 9.93
Tennessee Fund 9.63 - -
As of May 31, 2000, the combined federal and state income tax rates upon which
the taxable-equivalent yield quotations were based were 45.2% for the California
High Yield Fund and 43.2% for the Tennessee Fund. From time to time, as any
changes to the rates become effective, taxable-equivalent yield quotations
advertised by the Funds will be updated to reflect these changes. The Funds
expect updates may be necessary as tax rates are changed by federal and state
governments. The advantage of tax-free investments, like the Funds, will be
enhanced by any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the Funds.
CURRENT DISTRIBUTION RATE Current yield and taxable-equivalent yield, which are
calculated according to a formula prescribed by the SEC, are not indicative of
the amounts that were or will be paid to shareholders. Amounts paid to
shareholders are reflected in the quoted current distribution rate or
taxable-equivalent distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum offering price. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than interest, if
any, and is calculated over a different period of time. The current distribution
rates for the 30-day period ended May 31, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
--------------------------------------------------------------------------
California High Yield Fund 5.67 5.31 5.28
Tennessee Fund 5.33 - -
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the current distribution rate. The advertised taxable-equivalent
distribution rate will reflect the most current federal and state tax rates
available to the Fund. The taxable-equivalent distribution rates for the 30-day
period ended May 31, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
--------------------------------------------------------------------------
California High Yield Fund 10.35 9.69 9.64
Tennessee Fund 9.39 - -
VOLATILITY Occasionally statistics may be used to show a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS The Funds also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Each Fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in the Fund may
satisfy your investment goal, advertisements and other materials about the Fund
may discuss certain measures of Fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
o Salomon Smith Barney Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40 bonds.
The index attempts to track the new-issue market as closely as possible, so
it changes bonds twice a month, adding all new bonds that meet certain
requirements and deleting an equivalent number according to their secondary
market trading activity. As a result, the average par call date, average
maturity date, and average coupon rate can and have changed over time. The
average maturity generally has been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, and MONEY MAGAZINES - provide performance statistics
over specified time periods.
o Salomon Smith Barney Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R)companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R)and Bloomberg(R)L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
From time to time, advertisements or information for each Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or sales material issued by each Fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit research
and public education organization. The report illustrates, among other things,
the annual amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare each Fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the Fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. CDs are frequently insured by an agency of the U.S. government. An
investment in a Fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to any Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by a Fund to calculate its figures. In addition,
there can be no assurance that a Fund will continue its performance as compared
to these other averages.
MISCELLANEOUS INFORMATION
------------------------------------------------------------------------------
The Funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Funds cannot guarantee that these goals will be met.
The Funds are members of Franklin Templeton Investments, one of the largest
mutual fund organizations in the U.S., and may be considered in a program for
diversification of assets. Founded in 1947, Franklin is one of the oldest mutual
fund organizations and now services approximately 3 million shareholder
accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and
an innovator in creating domestic equity funds, joined forces with Templeton, a
pioneer in international investing. The Mutual Series team, known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, Franklin Templeton Investments has over
$229 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. Franklin Templeton Investments
offers 108 U.S. based open-end investment companies to the public. Each Fund may
identify itself by its Nasdaq symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$44 billion in municipal security assets for over three quarters of a million
investors.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 2000, taxes could cost almost $47
on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 2000).
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds also may provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of municipal securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of the Fund's
shares.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the Fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
These bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
BELOW INVESTMENT GRADE
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa in its municipal 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 RATINGS GROUP (S&P(R))
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BELOW INVESTMENT GRADE
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal that is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BELOW INVESTMENT GRADE
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. Business and financial alternatives can be identified,
however, that could assist the obligor in satisfying its debt service
requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings, which are also applicable to municipal paper investments, are opinions
of the ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations for both short-term debt and commercial paper, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
STATE TAX TREATMENT
------------------------------------------------------------------------------
The following information on the income tax treatment of dividends from each
Fund is based upon correspondence and sources believed to be reliable. Except
where otherwise noted, the information pertains to individual state income
taxation only. You may be subject to local taxes on dividends or the value of
your shares. Corporations, trusts, estates and other entities may be subject to
other taxes and should consult with their tax advisors or their state department
of revenue. For some investors, a portion of the dividend income may be subject
to the federal and/or state alternative minimum tax.
CALIFORNIA Exempt-interest dividends paid by the Fund will not be subject to
federal income taxes or California personal income taxes. An exempt-interest
dividend is any dividend paid by the Fund with respect to interest on
obligations of the U.S. government or its territories or possessions and with
respect to obligations of California or certain of its political subdivisions.
In order to qualify, in part, at least 50% of the Fund's assets must consist of
such obligations. The Fund has qualified and continues to qualify to pay
exempt-interest dividends.
Dividends paid by the Fund from interest on obligations exempt from tax in
California generally will be fully taxable to corporate shareholders who are
subject to California's corporate franchise tax.
TENNESSEE Provided the Fund qualifies as a regulated investment company under
the Internal Revenue Code, distributions from the Tennessee Fund will not be
subject to the Tennessee stock and bond income tax, to the extent that such
distributions are attributable to interest on (i) bonds or securities of the
U.S. government, its agencies or instrumentalities, or (ii) bonds of the state
of Tennessee or any of its counties, municipalities or political subdivisions.
Other distributions from the Tennessee Fund, including dividends attributable to
obligations of issuers in states other than Tennessee and capital gain
distributions, will be fully taxable for purposes of the Tennessee stock and
bond income tax.
FRANKLIN MUNICIPAL SECURITIES TRUST
FILE NOS. 33-44132 &
811-6481
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the previously
filed documents indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Agreement and Declaration of Trust dated December 10, 1991
Filing: Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(ii) Certificate of Trust dated December 10, 1991 Filing:
Post-Effective Amendment No. 7 to Registration Statement on
Form N-1A
File No. 33-44132
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 on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(b) By-Laws
(i) By-Laws
Filing: Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(ii) Amendment to By-Laws dated April 19, 1994
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: February 28, 1996
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between Registrant and Franklin Advisers,
Inc. dated February 26, 1992
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(ii) Amendment to Management Agreement between Registrant and
Franklin Advisers, Inc. dated August 1, 1995
Filing: Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A
File No. 33-44132
Filing Date: February 28, 1996
(e) Underwriting Contracts
(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 on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 23, 1999
(iii) Amendment of Amended and Restated Distribution Agreement
between Registrant and Franklin/Templeton Distributors, Inc.
dated January 12, 1999
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 23, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 23, 1999
(ii) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 23, 1999
(iii) Amendment, dated May 7, 1997, to the Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 22, 1998
(iv) Amendment dated August 30, 2000 to Exhibit A of the Master
Custody Agreement
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated October 1,
1996 between Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 23, 1999
(ii) Amendment dated August 10, 2000 to the Subcontract for Fund
Administrative Services dated October 1, 1996 between Franklin
Advisers, Inc. and Franklin Templeton Services, Inc.
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated July 14, 1998
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 22, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letters of Understanding dated February 11, 1992 and March 6,
1992
Filing: Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: July 31, 1995
(m) Rule 12b-1 Plan
(i) Amended and Restated Distribution Plan between Registrant, on
behalf of Franklin California High Yield Municipal Fund, and
Franklin/Templeton Distributors, Inc. dated July 1, 1993
Filing: Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: April 30, 1993
(ii) Distribution Plan between Registrant, on behalf of Franklin
Tennessee Municipal Bond Fund, and Franklin/Templeton
Distributors, Inc. dated May 10, 1994
Filing: Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: March 11, 1994
(iii) Class C Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin California High Yield
Municipal Fund, and Franklin/Templeton Distributors, Inc.
dated March 22, 1996
Filing: Post-Effective Amendment No. 10 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: September 27, 1996
(iv) Class B Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin California High Yield
Municipal Fund and Franklin/Templeton Distributors, Inc. dated
February 1, 2000
(n) Rule 18f-3 Plan
(i) Multiple Class Plan on behalf of Franklin California High
Yield Municipal Fund dated February 1, 2000
(p) Code of Ethics
(i) Code of Ethics
(q) Power of Attorney
(i) Power of Attorney dated January 20, 2000
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-44132
Filing Date: January 27, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a Court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or trustees for (1) Franklin Advisers, Inc.'s (Advisers) corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in Franklin
Templeton Investments. In addition, Mr. Charles B. Johnson was formerly a
director of General Host Corporation. For additional information please see Part
B and Schedules A and D of Form ADV of Advisers (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors of
Advisers 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 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Growth and Income Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Master Trust
Franklin Floating Rate Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
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 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the 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 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certified that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 28th day
of September, 2000.
FRANKLIN MUNICIPAL SECURITIES TRUST
(Registrant)
By: /s/DAVID P. GOSS
David P. Goss
Vice President
Pursuant to the requirements of the Securities Act of 1933, this 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, Jr. Executive Officer
Dated: September 28, 2000
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: September 28, 2000
Kimberly H. Monasterio* Principal Accounting Officer
Kimberly H. Monasterio Dated: September 28, 2000
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: September 28, 2000
Harris J. Ashton* Trustee
Harris J. Ashton Dated: September 28, 2000
Harmon E. Burns* Trustee
Harmon E. Burns Dated: September 28, 2000
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: September 28, 2000
Edith E. Holiday* Trustee
Edith E. Holiday Dated: September 28, 2000
Charles B. Johnson* Trustee
Charles B. Johnson Dated: September 28, 2000
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: September 28, 2000
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: September 28, 2000
Hayato Tanaka* Trustee
Hayato Tanaka Dated: September 28, 2000
*By /s/David P. Goss
David P. Goss, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN MUNICIPAL SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.a(i) Agreement and Declaration of Trust *
dated December 10, 1991
EX-99.a(ii) Certificate of Trust dated *
December 10, 1991
EX-99.a(iii) Certificate of Amendment to Certificate of *
Trust dated May
14, 1992
EX-99.b(i) By-Laws *
EX-99.b(ii) Amendment to the By-Laws dated *
April 19, 1994
EX-99.d(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated February 26, 1996
EX-99.d(ii) Amendment to Management Agreement *
between Registrant and Franklin
Advisers, Inc. dated August 1, 1995
EX-99.e(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc. dated April 23, 1995
EX-99.e(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors,
Inc. and Securities Dealers
EX-99.e(iii) Amendment of Amended and Restated *
Distribution Agreement between
Registrant and Franklin/Templeton
Distributors, Inc. dated
January 12, 1999
EX-99.g(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(iii) Amendment, dated May 7, 1997, to *
the Master Custody Agreement between
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(iv) Amendment dated August 30, 2000 to Exhibit A Attached
of the Master Custody Agreement
EX-99.h(i) Subcontract for Fund Administrative Services *
dated October 1, 1996 between Franklin Advisers,
Inc. and Franklin Templeton Services, Inc.
EX-99.h(ii) Amendment dated August 10, 2000 to the Attached
Subcontract for Fund Administrative Services
dated October 1, 1996 between Franklin Advisers,
Inc. and Franklin Templeton Services, Inc.
EX-99.i(i) Opinion and Consent of Counsel *
dated July 14, 1998
EX-99.j(i) Consent of Independent Auditors Attached
EX-99.l(i) Letters of Understanding dated *
February 11, 1992 and March 6, 1992
EX-99.m(i) Amended and Restated Distribution Plan *
between Registrant, on behalf
of Franklin California High Yield Municipal
Fund, and Franklin/Templeton Distributors,
Inc. dated July 1, 1993
EX-99.m(ii) Distribution Plan between Registrant, on *
behalf of Franklin Tennessee Municipal Bond
Fund, and Franklin/Templeton Distributors,
Inc. dated May 10, 1994
EX-99.m(iii) Class C Distribution Plan pursuant to Rule *
12b-1 between Registrant, on behalf of
Franklin California High Yield
Municipal Fund, and Franklin/Templeton
Distributors, Inc. dated March 22, 1996
EX-99.m(iv) Class B Distribution Plan pursuant to Rule Attached
12b-1 between Registrant, on behalf of
Franklin California High Yield Municipal
Fund and Franklin/Templeton Distributors,
Inc. dated February 1, 2000
EX-99.n(i) Multiple Class Plan on behalf of Franklin Attached
California High Yield Municipal Fund dated
February 1, 2000
EX-99.p(i) Code of Ethics Attached
EX-99.q(i) Power of Attorney dated January 20, 2000 *
* Incorporated by reference
