Franklin
New York Tax-Free
Income Fund
PROSPECTUS October 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin New York Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company. Its investment objective is to provide
as high a level of dividend income exempt from federal, New York state and New
York City income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The Fund will seek to achieve this
investment objective through investing primarily in long-term New York state
municipal and public authority debt obligations. Investments in municipal
securities will be within the four highest municipal ratings of either Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch") or in unrated securities which in the opinion
of the Fund's investment manager are of comparable quality to such four highest
municipal ratings, at the time of purchase (see "Investment Objective and
Policies of the Fund"). Except for temporary defensive purposes, at least 80% of
the Fund's assets will be invested in municipal securities.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
The Fund offers two classes to its investors: Franklin New York Tax Free Income
Fund - Class I ("Class I") and Franklin New York Tax-Free Income Fund - Class II
("Class II"). Investors can choose between Class I shares, which generally bear
a higher front-end sales charge and lower ongoing Rule 12b-1 distribution fees
("Rule 12b-1 fees"), and Class II shares, which generally have a lower front-end
sales charge and higher ongoing Rule 12b-1 fees. Investors should consider the
differences between the two classes, including the impact of sales charges and
distribution fees, in choosing the more suitable class given their anticipated
investment amount and time horizon. See "How to Buy Shares of the Fund -
Differences Between Class I and Class II."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
A Statement of Additional Information ("SAI") concerning the Fund, dated October
1, 1995, and as may be amended from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to some investors. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address or telephone number schown
above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table.................... 3
Financial Highlights............. 4
About the Fund................... 5
Investment Objective and
Policies of the Fund............ 5
Management of the Fund........... 11
Distributions to Shareholders.... 13
Effect of Federal and New York Taxes
on an Investment in the Fund.... 15
How to Buy Shares of the Fund.... 16
Other Programs and Privileges
Available to Fund Shareholders.. 23
Exchange Privilege............... 25
How to Sell Shares of the Fund... 28
Telephone Transactions........... 32
Valuation of Fund Shares......... 33
How to Get Information Regarding
an Investment in the Fund....... 33
Performance...................... 34
General Information.............. 35
Account Registrations............ 36
Important Notice Regarding
Taxpayer IRS Certifications..... 37
Portfolio Operations............. 38
Special Factors Affecting
an Investment in the Fund....... 38
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Class I shares for the fiscal year ended May 31, 1995,
except as otherwise noted.
Shareholder Transaction Expenses Class I Class II
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................ 4.25% 1.00%+
Deferred Sales Charge....................................... NONE++ 1.00%++
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................................. 0.46% 0.46%
Rule 12b-1 Fees............................................. 0.06%* 0.65%*
Other Expenses.............................................. 0.05 0.05%**
Total Fund Operating Expenses............................... 0.57% 1.16%
-------- --------
-------- --------
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. (See "How to Buy Shares of the Fund - Purchase Price of Fund Shares"
for the definition of Franklin Templeton Funds and similar references.)
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month following such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
*Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
**"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended May 31, 1995.
Investors should be aware that the preceding table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charges, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
1 Year 3 Years 5 Years 10 Years
Class I....................................... $48* $60 $73 $111
Class II...................................... $32 $46 $73 $149
*assumes that a contingent deferred sales charge will not apply to Class I
shares. A shareholder of Class II would pay the following expenses on the same
investment, assuming no redemption.
1 year 3 years 5 years 10 years
$22 $46 $73 $149
This example is based on the restated aggregate annual operating expenses shown
above and should not be considered a representation of future expenses, which
may be more or less than those shown. The operating expenses are borne by the
Fund, and only indirectly by shareholders as a result of their investment in the
Fund. In addition, federal regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a Class I
share of the Fund for the ten fiscal years in the period ended May 31, 1995.
Information regarding Class II shares is included for the period from its
effective date (May 1, 1995) to May 31, 1995. The information for each of the
five fiscal years in the period ended May 31, 1995 has been audited by Coopers &
Lybrand L.L.P. independent auditors, whose audit report appears in the financial
statements in the Fund's Annual Report to Shareholders dated May 31, 1995. The
information for the preceding five fiscal years ended May 31,1990, which are
also audited, are not covered by the auditors' current report. See the
discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Class I Shares:
Distri- Net
Net Asset Net Net Realized butions Asset Net Ratio of Ratio of
Year Value Invest- & Unrealized Total From From Net Distributions Value Assets Expenses Net Income Portfolio
Ended Beginning ment Gains(Losses) Investment Investment From Realized at End Total at End to Average to Average Turnover
May 31 of Year Income on Securities Operations Income Capital Gains of Year Return+ of Year Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $11.72 $0.73 $0.056 $0.756 $(0.756) $11.75 7.10%$ 4,725,056 0.57% 6.39% 40.56%
1994 12.07 0.75 (0.338) 0.412 (0.762) 11.72 3.18 4,609,998,773 0.52 6.19 25.67
1993 11.45 0.77 0.630 1.400 (0.780) 12.07 12.35 4,339,249,477 0.52 6.56 12.28
1992 10.94 0.78 0.523 1.303 (0.793) 11.45 12.05 3,570,851,373 0.51 7.01 19.37
1991 10.85 0.80 0.086 0.886 (0.796) 10.94 8.20 3,108,151,314 0.50 7.34 18.62
1990 11.05 0.80 (0.208) 0.592 (0.792) 10.85 5.25 2,914,840,197 0.50 7.30 15.47
1989 10.52 0.80 0.542 1.342 (0.812) 11.05 12.95 2,794,766,262 0.51 7.42 25.68
1988 10.73 0.80 (0.021) 0.779 (0.846) $(0.143) 10.52 7.33 2,547,061,533 0.51 7.57 57.94
1987 11.19 0.91 (0.265) 0.645 (0.925) (0.180) 10.73 5.19 2,558,855,184 0.52 7.04 33.64
1986 10.49 0.92 0.740 1.660 (0.960) 11.19 16.12 1,599,270,664 0.55 7.68 18.61
Class II Shares:
Distri- Net
Net Asset Net Net Realized butions Asset Net Ratio of Ratio of
Year Value Invest- & Unrealized Total From From Net Distributions Value Assets Expenses Net Income Portfolio
Ended Beginning ment Gains(Losses) Investment Investment From Realized at End Total at End to Average to Average Turnover
May 31 of Period Income on Securities Operations Income Capital Gains of Year Return+ of Year Net Assets Net Assets Rate
++1995 $11.72 $0.73 $0.056 $0.756 $(0.756) $11.75 7.10%$ 4,725,056 0.57% 6.39% 40.56%
</TABLE>
* Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge or the deferred contingent sales charge. The total return for Class I
shares also assumes reinvestment of dividends at the offering price and capital
gains, if any, at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 Distribution Plan for Class I shares, as
discussed in Note 5, the existing sales charge on reinvested dividends has been
eliminated.
** Per share amounts have been calculated using the daily average shares
outstanding during the period.
+Annualized
++For the period May 1, 1995 (effective date) to May 31, 1995.
About the Fund
The Fund, incorporated under the laws of the state of New York on May 14, 1982,
is a diversified, open-end management investment company, commonly called a
"mutual fund" and has registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act"). As of May 1, 1995, the Fund issues two classes of
capital stock with a par value of $0.01 per share: Franklin New York Tax Free
Income Fund - Class I ("Class I") and Franklin New York Tax-Free Income Fund -
Class II ("Class II"). All Fund shares outstanding before May 1, 1995, have been
redesignated as Class I shares, and will retain their previous rights and
privileges, except for legally required modifications to shareholder voting
procedures, as discussed in "General Information - Voting Rights."
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of Fund Shares"), plus a variable sales charge not exceeding 4.25% of
the offering price depending upon the amount invested. The current public
offering price of the Class II shares is equal to the net asset value, plus a
sales charge of 1% of the amount invested. (See "How to Buy Shares of the
Fund.")
Investment Objective
and Policies of the Fund
The Fund's investment objective is to provide as high a level of dividend income
exempt from federal, New York state and New York City income taxes as is
consistent with prudent investing, while seeking preservation of shareholder's
capital, by investing the Fund's assets in municipal securities exempt from such
taxes. The Fund will seek to achieve its objective by investing primarily in New
York state, municipal and public authority debt obligations with a maturity of
more than one year. In addition, the Fund may also invest its assets in
obligations of municipal issuers located in Puerto Rico, the U.S. Virgin Islands
and Guam, since dividends paid by the Fund, to the extent attributable to such
sources, are exempt from regular federal income taxes and from New York state
and New York City personal income taxes. The investment objective of the Fund is
a fundamental policy and may not be changed without shareholder approval.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security generally is
rendered to the issuer by the issuer's counsel at the time of issuance of the
security.
Municipal securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to provide funding for privately operated
facilities. Further information on the maturity and funding classifications of
municipal securities is included in the SAI.
Types of Securities the Fund May Purchase
The Fund may invest, without percentage limitations, in securities having at the
time of purchase one of the four highest ratings of municipal securities by
Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB), or
in securities which are not rated by the services, provided that, in the opinion
of the Fund's investment manager, such securities are comparable in quality to
those within the four highest municipal ratings. The ratings agencies consider
that bonds rated in the fourth highest category may have some speculative
characteristics and that changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than in the cases with higher grade bonds. In the event the rating on
an issue held in the Fund's portfolio is lowered by the rating service, such
change will be considered by the Fund in its evaluation of the overall
investment merits of that security but such change will not necessarily result
in an automatic sale of the security. A description of the municipal ratings is
contained in the Appendix to the Statement of Additional Information.
Prior to acquiring unrated securities, the investment manager considers the
terms of the offering and various other factors in order to determine if the
securities are consistent with the Fund's investment objective and policies, and
the issuer's comparative credit rating. In making such determinations the
investment manager may typically (i) interview representatives of the issuer at
its offices, conducting a tour and inspection of the physical facilities of the
issuer in an effort to evaluate the issuer and its operations, (ii) perform
analysis of the issuer's financial and credit position, including comparisons of
all appropriate ratios, and/or (iii) compare other similar securities offerings
to the issuer's proposed offering.
The Fund has never invested in any obligations paying income subject to regular
federal income taxes or which is treated as a tax preference item under the
federal alternative minimum tax. However, from time to time due to unusual
circumstances, such as avoiding the necessity of liquidating portfolio
investments to meet withdrawals of funds by investors, the Fund may temporarily
invest up to 20% of its assets, pending investment or reinvestment in municipal
bonds, in fixed-income obligations, the interest on which is subject to regular
federal income tax. Any investments in taxable obligations will be substantially
in Treasury bills, commercial paper and obligations of U.S. banks (including
commercial banks and savings and loan associations) with assets of $1 billion or
more.
As a fundamental policy, the Fund may not purchase securities of any issuer
which would result in more than 5% of the value of the Fund's gross assets being
invested in the securities of any one issuer, but this limitation does not apply
to investments issued or guaranteed by the U.S. government or its
instrumentalities. In determining the issuer of a tax-exempt security, each
state and each political subdivision, agency and instrumentality of each state
and each multi-state agency of which such state is a member is regarded as a
separate issuer. Where securities are backed only by assets and revenues of a
particular instrumentality, facility or subdivision, such entity is considered
the issuer. A bond for which the payments of principal and interest are secured
by an escrow account of securities backed by the full faith and credit of the
U.S. government ("defeased"), in general, will not be treated as an obligation
of the original municipality for purposes of determining issuer diversification
under this policy. Percentage limitations referred to in this section and
elsewhere in this Prospectus are determined as of the time an investment is
made. When the Fund proposes to add to its position in the securities of an
issuer, it may value that position at the lesser of cost or current market
value, for the sole purpose of determining the amount of that issuer's
securities which may be purchased consistent with the 5% limitation described in
this paragraph. In addition to the fundamental policy described in this
paragraph, the Fund is classified as a diversified company under the 1940 Act
and as such, it is subject to the diversification requirements applicable to
diversified investment companies under the 1940 Act, which are described in the
SAI.
Under normal circumstances at least 65% of the Fund's total assets will be
invested in securities, the income from which is exempt from New York state
individual income taxation. As a fundamental policy, at least 80% of the Fund's
total assets will be invested in securities exempt from regular federal income
tax and the federal alternative minimum tax, except where market conditions due
to adverse factors would cause serious erosion of portfolio value, in which case
the Fund's assets may temporarily be substantially invested in short-term
taxable obligations as a defensive measure to preserve net asset value. During
such period, the Fund will not be pursuing its investment objective.
The Fund may also invest in variable or floating rate demand notes ("VRDNs").
These obligations bear interest at prevailing market rates. VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest according to its terms upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to such instrument. Although it is not a put option in the usual sense, such a
demand feature is sometimes known as a "put." With respect to 75% of the Fund's
assets, no more than 5% of such value may be in securities underlying "puts"
from the same institution, except that the Fund may invest up to 10% of its
asset value in unconditional "puts" (exercisable even in the event of a default
in the payment of principal or interest on the underlying security) and other
securities issued by the same institution.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for its portfolio consistent
with its investment objectives and policies and not for the purpose of
investment leverage.
The Fund may also invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. For example, a COP may be created when
long-term lease revenue bonds are issued by a governmental corporation to pay
for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. The lessor is, in effect, a lender secured by the
property being leased. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease without penalty if the municipality's appropriating body
does not allocate the necessary funds. Local administrations, being faced with
increasingly tight budgets have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property will be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, the essentiality of the leased property to
the municipality and the term of the lease compared to the useful life of the
leased property. The Board of Directors has determined that COPs held in the
Fund's portfolio constitute liquid investments based on various factors reviewed
by the investment manager and monitored by the Board. Such factors include (a)
the credit quality of such securities and the extent to which they are rated or,
if unrated, comply with existing criteria and procedures followed to ensure that
they are of quality comparable to the ratings required for Fund investment,
including an assessment of the likelihood that the leases will not be canceled;
(b) the size of the municipal securities market for the Fund, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
the Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
While there is no limit as to the amount of assets which the Fund may invest in
COP's, as of May 31, 1995, the Fund held 25.96% of its assets in such
instruments.
Some Characteristics of Municipal Securities
Municipal securities include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which municipal
securities or bonds may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses and the obtaining of
funds to loan to other public institutions and facilities. In addition, certain
types of Industrial Development Revenue Bonds are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, sports facilities, convention or trade show facilities, airports,
mass transit, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal (sometimes referred to as "private activity
bonds").
The two principal classifications of municipal securities are "general
obligation bonds" and "revenue bonds." General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facility or, in some cases, from the
proceeds of a special excise or specific revenue source. A type of revenue bond
common to New York state is a "moral obligation" bond. Under applicable New York
state law, the state may be called upon to restore deficits in reserve capital
funds of such agencies or authorities created with respect to the bonds. Any
such restoration requires appropriations by the state legislature and,
accordingly, the bonds do not constitute a legally enforceable obligation or
debt of the state. Industrial Development Revenue Bonds, which are municipal
bonds, are in most cases revenue bonds and do not generally constitute the
pledge of the credit of the issuer of such bonds. There are, of course,
variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce such risk. There are two
categories of risks to which the Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price. The Fund attempts to minimize the impact of individual credit
risks by diversifying its portfolio investments.
Market risk is the risk of price fluctuations of a municipal security caused by
changes in general economic and interest rate conditions generally affecting the
market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the price of the debt securities in which
the Fund invests are likely to decrease in times of rising interest rates.
Conversely, when rates fall, the value of the Fund's debt investments may rise.
Price changes of debt securities held by the Fund have a direct impact on the
net asset value per share of the Fund. Since the Fund generally will invest
primarily in the securities issued by New York and to a lesser extent Puerto
Rico public entities, there are certain factors and considerations concerning
New York and Puerto Rico which may affect the credit and market risk of the
municipal securities which the Fund purchases. See "Special Considerations
Affecting an Investment in the Fund" in this Prospectus.
The Fund has no restrictions on the maturities of municipal securities in which
the Fund may invest. The Fund will seek to invest in municipal securities of
such maturities that, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with prudent investing.
The investment manager will also consider current market conditions in
determining which securities to buy or hold.
It is possible that the Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, Industrial Development Revenue
Bonds, transportation bonds, or pollution control revenue bonds, or in
securities the interest on which is paid from revenues of a similar type of
project. In such circumstances, economic, business, political, or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or needs for the projects) might also affect other bonds in the same segment,
thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation, and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to make timely payment of principal and
interest on its obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"). This interest could subject a shareholder to, or increase liability
under, the federal alternative minimum tax, depending on the shareholder's tax
situation. In addition, all distributions derived from interest exempt from
regular federal income tax may subject a corporate shareholder to, or increase
liability under, the federal alternative minimum tax, because such distributions
are included in the corporation's "adjusted current earnings." The Fund does not
own and does not presently intend to purchase any private activity bonds but
reserves the right to acquire them in the future. The Code also imposes certain
limitations and restrictions on the use of tax-exempt bond financing for
non-government business activities, such as Industrial Development Revenue
Bonds, and, to the extent interest on such bonds is not tax-exempt, they will
not be purchased by the Fund. The Fund is subject to a number of additional
investment restrictions, some of which may be changed only with the approval of
shareholders, which limit its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed herein,
please see the SAI.
The Fund's investments in unrated municipal securities may cause the Fund to
recognize income and make distributions to shareholders prior to the receipt of
cash payments. For example, with respect to non-performing obligations, the Fund
may be required to accrue as income the original amount of interest due on its
obligations even though such interest is not received by the Fund. The Fund does
not presently intend to purchase any unrated securities, but reserves the right
to acquire them in the future.
The Fund's investment in zero coupon and delayed interest bonds may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments.
In order to generate cash to satisfy distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Callable Bonds
Callable municipal bonds are municipal bonds which contain a provision in the
indenture permitting the issuer to redeem the bonds prior to their maturity
dates at a specified price which typically reflects a premium over the bonds'
original issue price. These bonds generally have call-protection (that is, a
period of time during which the bonds may not be called) which usually lasts for
7 to 10 years, after which time such bonds may be called away. An issuer may
generally be expected to call its bonds, or a portion of them, during periods of
relatively declining interest rates, when borrowings may be replaced at lower
rates than those obtained in prior years. If the proceeds of a bond called under
such circumstances are reinvested, the result may be a lower overall yield due
to lower current interest rates. If the purchase price of such bonds included a
premium related to the appreciated value of the bonds, some or all of that
premium may not be recovered by bondholders, such as the Fund, depending on the
price at which such bonds were redeemed. Normally, the Fund may not hold called
bonds until they are redeemed if that will result in a lost premium. In many
cases, the investment manager will attempt to time the sale to recover what the
investment manager considers to be the optimum amount of premium obtainable
considering market conditions and the time remaining before redemption.
Other Restrictions
It is the policy of the Fund that illiquid securities (including securities with
legal or contractual restrictions on resale, or other instruments which are not
readily marketable or have no readily ascertainable market value) may not
constitute, at the time of the purchase, more than 10% of the value of the total
net assets of the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
How Shareholders Participate
in the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader bond markets, as
well changes in interest rates will affect the value of the Fund's portfolio and
thus its share price. In particular, changes in interest rates will affect the
value of the Fund's portfolio and thus its share price. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Fund shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.
Management of the Fund
The Board of Directors (the "Board") has the primary responsibility for the
overall management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
It is the Fund's present intention to offer only two classes of shares, but new
classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (115 separate series) with aggregate assets of over $77 billion,
approximately $42 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended May 31, 1995, fees totaling 0.46% of the average
monthly net assets of Class I shares ofthe Fund were paid to Advisers.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions which involve the receipt by the broker of a spread between the bid
and ask prices for the securities, and not the receipts of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
such transactions will be effected. The Manager would try to obtain the best
execution on all such transactions. If it is felt that more than one broker
would be able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
the Fund, as factors in selecting a broker. Further information is included
under "The Fund's Policies Regarding Brokers Used on Portfolio Transactions" in
the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended May 31, 1995, the expenses borne by Class I shares
of the Fund, including fees paid to Advisers and to Investor Services, totaled
0.51% of the average monthly net assets of such class. Class II annualized
expenses for the period from May 1, 1995 to May 31, 1995, totaled 1.09%.
Plans of Distribution
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plans") pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class will be
based solely on the distribution and servicing fees attributable to that
particular class. Under each Plan, the class may reimburse Distributors for
routine ongoing promotion and distribution expenses incurred with respect to
such class. Such expenses may include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
The maximum amount which the Fund may pay to Distributors or others under the
Class I Plan for such distribution expenses is 0.10% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.10% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund.
Under the Class II Plan, the Fund is permitted to pay to Distributors or others
distribution and related expenses of up to 0.50% per annum of Class II's daily
net assets, payable quarterly. All expenses of distribution, marketing and
related services over that amount will be borne by Distributors or others who
have incurred them, without reimbursement by the Fund. In addition, the Class II
Plan provides for an additional payment by the Fund of up to 0.15% per annum of
Class II's average daily net assets as a servicing fee, payable quarterly. This
fee will be used to pay securities dealers or others for, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, or similar activities related to furnishing personal services and/or
maintaining shareholder accounts.
During the first year following the purchase of Class II shares, Distributors
will retain 0.50% per annum of Class II's average daily net assets to partially
recoup fees Distributors pays to securities dealers. Distributors, or its
affiliates, may pay, from its own resources, a commission of up to 1% of the
amount invested to securities dealers who initiate and are responsible for
shareholders' purchases of Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of each Plan's fees, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distributions to Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Fund's Board, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends monthly for shareholders of record on the last business day of the
month, payable on or about the 15th day of the following month.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Fund's Board. Fund shares are
quoted ex-dividend on the first business day following the record date.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Shareholders in Class I funds may
direct all their dividends and capital gain distributions for investment in
another Class I Franklin Templeton Fund at net asset value. Except as otherwise
noted, dividend and capital gain distributions are only eligible for
reinvestment at net asset value in the same class of shares of the Fund or the
same class of another of the Franklin Templeton Funds. Shareholders in Class II
funds may direct their dividends and capital gain distributions for investment
in either a Class I or Class II Franklin Templeton Fund at net asset value.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change will be effective
only as to distributions for which the record date is seven or more business
days after the Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions In Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to a Class I
Franklin Templeton Money Market Fund, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Dividends which may be
paid in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department. See "Purchases at Net Asset Value" under "How
to Buy Shares of the Fund."
Effect of Federal and New York Taxes
on an Investment in the Fund
The following discussion reflects some of the provisions of the Code and of
state tax law which affect mutual funds and their shareholders. Additional
information on tax matters relating to the Fund and its shareholders is included
in the section entitled "Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders. Such
exempt-interest dividends are derived from interest income exempt from regular
federal income tax and are not subject to regular federal income tax for Fund
shareholders. In addition, to the extent that exempt-interest dividends are
derived from interest on obligations of New York state and its political
subdivisions or from interest on U.S. territorial obligations (including Puerto
Rico, the U.S. Virgin Islands and Guam), they will be exempt from New York state
and City personal income taxes. However, for corporate taxpayers subject to the
New York state franchise tax, the foregoing categories of interest income will
generally be taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions) or from
the excess of net short-term capital gain over net long-term capital loss or
from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond was issued with orginal issue discount and such market discount exceeds the
minimum amount under the code. For such obligations purchased after April 30,
1993, a portion of the gain on sale or disposition (not to exceed the accrued
portion of market discount as of the time of sale or disposition) is treated as
ordinary income rather than capital gain. Any distribution by the Fund of such
ordinary income to its shareholders will be subject to regular federal and state
income taxes in the hands of Fund shareholders. In any fiscal year, the Fund may
elect not to distribute to its shareholders its taxable ordinary income and to,
instead, pay federal income or excise taxes on this income at the Fund level.
The amount of such distributions, if any, is expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if received by the shareholder on December 31 of the calendar year in which they
are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on a sale or exchange
of Fund shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares and will be disallowed to the extent of exempt-interest dividends
paid with respect to such shares. All or a portion of the sales charge incurred
in purchasing shares of the Fund will not be included in the federal tax basis
of such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or another fund in the Franklin Templeton
Funds and a sales charge which would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment. Shareholders should consult with their tax advisors
concerning the tax rules applicable to the redemption or exchange of Fund
shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or income that is
a tax preference item under the federal alternative minimum tax.
Shareholders who have not held shares of the Fund for a full calendar year may
have designated as tax-exempt or as tax preference income a percentage of income
which is not equal to the actual amount of tax-exempt or tax preference income
earned during the period of their investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose their receipt of tax-exempt interest dividends on their
federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares may not be fully deductible for federal income tax
purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Differences Between Class I and Class II. Class I and Class II shares differ in
the amount of their front-end sales charges and Rule 12b-1 fees as well as the
circumstances under which the contingent deferred sales charge applies.
Generally Class I shares have higher front-end sales charges than Class II
shares and comparatively lower Rule 12b-1 fees. Voting rights of each class will
be the same on matters affecting the Fund as a whole, but each will vote
separately on matters affecting its class.
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights, and privileges. Voting rights of each class will be the same on
matters affecting the Fund as a whole, but each will vote separately on matters
affecting its class. Class I shares are generally subject to a variable sales
charge upon purchase and not subject to any sales charge upon redemption. Class
I shares are subject to Rule 12b-1 fees of up to an annual maximum of 0.10% of
average daily net assets of such shares. With this multiclass structure, Class I
shares have higher front-end sales charges than Class II shares and
comparatively lower Rule 12b-1 fees. Class I shares may be purchased at a
reduced front-end sales charges or at net asset value if certain conditions are
met. In most circumstances, contingent deferred sales charges will not be
assessed against redemptions of Class I shares. See "Management of the Fund,"
and "How to Sell Shares of the Fund" for more information.
Class II. The current public offering price of Class II shares is equal to the
net asset value, plus a front-end sales charge of 1% of the amount invested.
Class II shares are also subject to a contingent deferred sales charge of 1% if
shares are redeemed within 18 months of the calendar month of purchase. In
addition, Class II shares are subject to Rule 12b-1 fees of up to a maximum of
0.65% per annum of average daily net assets of such shares, 0.50% of which will
be retained by Distributors during the first year of investment. Class II shares
have lower front-end sales charges than Class I shares and comparatively higher
Rule 12b-1 fees. See "Contingent Deferred Sales Charge" under "How to Sell
Shares of the Fund".
Purchases of Class II shares are limited to purchases below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however, may
be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares.
Deciding Which Class to Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in front end sales charges. For this reason, Class I
shares may be more attractive to long-term investors even if no sales charge
reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges
definitely should consider purchasing Class I shares, especially if they intend
to hold their shares approximately six years or more. Investors who qualify to
purchase Class I shares at reduced sales charges but who intend to hold their
shares less than approximately six years should evaluate whether it is more
economical to purchase Class I shares through a Letter of Intent or under Rights
of Accumulation or other means, rather than purchasing Class II shares.
INVESTORS INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT AND OTHER INVESTORS
WHO QUALIFY TO PURCHASE CLASS I SHARES AT NET ASSET MAY NOT PURCHASE CLASS II
SHARES.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different sales charge,
bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase.
Purchase Price of Fund Shares
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Fund Shares."
Set forth below is a table of total front-end sales charges or underwriting
commissions and dealer concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more None None (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction) and (c) the U.S.
registered mutual funds in the Templeton Group of Funds except Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton
Funds are collectively referred to as the "Franklin Templeton Funds.") Sales
charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1.00% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks. See definitions under "Description of Special Net Asset Value Purchases"
and as set forth in the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
See table below:
<TABLE>
<CAPTION>
Class II Shares -- Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested Of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers. (See "Plans of
Distribution.")
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1.0% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of the Fund
- - Contingent Deferred Sales Charge."
Distributors, or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for a discount, an investment in any of the
Franklin Templeton Investments may be combined with those of the investor's
spouse, children under the age of 21 and grandchildren under the age of 21. The
value of Class II shares owned by the investor may also be included for this
purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights Of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter Of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in Class I shares
registered in the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the reserved shares will be
paid as directed by the investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional Information
Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Fund at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.50%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any investments made by such parties after
cessation of employment; (2) companies exchanging shares with or selling assets
pursuant to a merger, acquisition or exchange offer; (3) accounts managed by the
Franklin Templeton Group; (4) registered securities dealers and their
affiliates, for their investment account only, and (5) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing securities
dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 365 days after the redemption. The 365 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same fund
is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of the Fund within 365 DAYS of the payment date of such distribution.
To exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds, which was subject to a front-end sales charge or a contingent
deferred sales charge and which has investment objectives similar to those of
the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Sales Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. Purchases of $1 million or
more in a single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the section "Purchases at Net
Asset Value" and "Description of Special Net Asset Value Purchases" above for a
discussion of when shares may be purchased at net asset value.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges
Available to Fund Shareholders
CERTAIN PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE AVAILABLE
DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH
THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED
"ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of Class I shares and
Class II shares may be subject to a contingent deferred sales charge if the
shares are redeemed within the contingency period of the class. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semi-annually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% (or applicable) contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000, only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives or policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period of the class, a
contingent deferred sales charge will be imposed. Before making an exchange
investors should review the prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were purchased without a sales charge will be charged a sales
charge in accordance with the terms of the prospectus of the fund and the class
of shares being purchased, unless the original investment in the Franklin
Templeton fund was made pursuant to the privilege permitting purchases at net
asset value as discussed under "How to Buy Shares of the Fund." Exchanges of
Class I shares of the Fund which were purchased with a lower sales charge into a
fund which has a higher sales charge will be charged the difference in sales
charges, unless the shares were held in the Fund for at least six months prior
to executing the exchange.
When an investor requests the exchange of the total value of the Fund account
declared but unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
There are differences among the many Franklin Templeton Funds. Before making an
exchange, a shareholder should obtain and review a current prospectus of the
fund into which the shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities unless it is felt that attractive investment opportunities consistent
with the Fund's investment objectives exist immediately. Subsequently, this
money will be withdrawn from such short-term tax-exempt municipal securities and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
Timing Accounts are not permitted to purchase shares of the Fund or to exchange
into the Fund.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed for Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton Class
I money market fund. If a Class I account has shares subject to a contingent
deferred sales charge, Class I shares will be exchanged into the new account on
a "first-in, first-out" basis. See also "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the 18 months
contingent deferred sales charge, and Class II shares that are not, the shares
will be transferred proportionately into the new fund. Shares received from
reinvestment of dividends and capital gains are referred to as "free shares,"
shares which were originally subject to a contingent deferred sales charge but
to which the contingent deferred sales charge no longer applies are called
"matured shares," and shares still subject to the contingent deferred sales
charge are referred to as "CDSC liable shares." CDSC liable shares held for
different periods of time are considered different types of CDSC liable shares.
For instance, if a shareholder has $1,000 in free shares, $2,000 in matured
shares, and $3,000 in CDSC liable shares, and the shareholder exchanges $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares. Similarly, if CDSC liable shares
have been purchased at different periods, a proportionate amount will be taken
from shares held for each period. If, for example, a shareholder holds $1,000 in
shares bought 3 months ago, $1,000 bought 6 months ago, and $1,000 bought 9
months ago, and the shareholder exchanges $1,500 into the new fund, $500 from
each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. Class I shares may be exchanged for shares of any of the
money market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money market
funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell his Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions By Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated, at the scheduled close of the New York Stock Exchange ("Exchange"),
which is generally 1:00 p.m. Pacific time, each day that the Exchange is open
for business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered shareholders
exactly as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own protection, to send
the share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions By Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, and government entities which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions By Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund and the class, the account
number, the fact that the repurchase was ordered by a dealer and the dealer's
name. Details of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is processed upon receipt
of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers regarding Class I
investments of $1 million or more and any Class II investments redeemed within
the contingency period (12 months for Class I and 18 months for Class II) will
be assessed a contingent deferred sales charge, unless one of the exceptions
described below applies. The charge is 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period of the class; (ii) shares purchased with reinvested dividends
and capital gain distributions; and (iii) other shares held longer than the
contingency period; and followed by any shares held less than the contingency
period, on a "first in, first out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds or
an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; redemptions through a Systematic
Withdrawal Plan set up for shares prior to February 1, 1995, and for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually);
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size; and redemptions following the death of the
shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including: (i) effect a change in address, (ii) change a dividend option, (iii)
transfer Fund shares in one account to another identically registered account in
the Fund,(iv) request the issuance of certificates(to be sent to the
shareholder's address of record only) and (v) exchange Fund shares as described
in this Prospectus by telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum sales charge of each class of shares of the Fund).
The net asset value per share for each class of the Fund is determined in the
following manner: The aggregate of all liabilities, is deducted from the
aggregate gross value of all assets, and the difference is divided by the number
of shares of the respective class of the Fund outstanding at the time. For the
purpose of determining the aggregate net assets of each class of the Fund, cash
and receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over the counter
portfolio securities are valued within the range of the most current bid and ask
prices. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Municipal securities
generally trade in the over-the-counter market rather than on a securities
exchange. 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 directors, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund, except that the Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. The net asset value of all
outstanding shares of each class of the Fund will be computed on a pro rata
basis for each outstanding share based on the proportionate participation in the
Fund represented by the value of shares of such classes. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How to Get Information
Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Franklin Class I and Class II share codes for the Fund, which will be needed to
access system information are 115 and 215, respectively. The system's automated
operator will prompt the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired)1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of a class' performance, including current yield, various
expressions of total return, tax equivalent yield, current distribution rate and
taxable equivalent distribution rate. They may occasionally cite statistics to
reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result. Tax equivalent yield demonstrates the yield from a
taxable investment necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of each class' yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the class' yield.
Current yield and tax equivalent yield for each class which are calculated
according to a formula prescribed by the SEC (see the SAI) are not indicative of
the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate or taxable equivalent distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by a class
during the past 12 months by a current maximum offering price for that class of
shares. A taxable equivalent distribution rate demonstrates the taxable
distribution rate necessary to produce an after tax distribution rate equivalent
to the class' distribution rate (calculated as indicated above). Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' yield, total return, current yield, tax equivalent
yield, distribution rate, or taxable equivalent distribution rate may be in any
future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends May 31. Annual Reports containing audited financial
statements of the Fund, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to
shareholders. To reduce the volume of mail sent to one household as well as to
reduce Fund expenses, Investor Services, will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Fund's authorized capital stock consists of 5,000,000,000 shares of common
stock of $.01 par value divided into two classes. 2,500,000,000 shares of
capital stock have been allocated to Class I and 2,500,000,000 shares of stock
have been allocated to Class II. All shares have one vote and, when issued, are
fully paid and nonassessable. All shares have equal voting, participation and
liquidation rights, but have no subscription, preemptive or conversion rights.
A meeting of shareholders shall be held annually for the election of directors
and for the transaction of other business of the corporation. Shares of the Fund
have noncumulative voting rights which means that in all elections of directors,
the holders of more than 50% of the shares voting can elect 100% of the
directors if they choose to do so and, in such event, the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board. Shares of each class represent proportionate interests in the assets of
the Fund and have the same voting and other rights and preferences as the other
class of the Fund for matters that affect the Fund as a whole. For matters that
only affect a certain class of the Fund's shares, however, only shareholders of
that class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by the New York Business Corporation Act, or (3) required
to be voted on separately by class by the 1940 Act, or the rules adopted
thereunder. For instance, if a change to the Rule 12b-1 plan relating to Class I
shares requires shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Redemptions By The Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder.
More information is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
Mr. Thomas Kenny, Mr. John B. Pinkham and Mr. John Pomeroy are primarily
responsible for the day-to-day management of the Fund's portfolio. Their
business history for at least the last five years and positions with the Manager
are shown below:
Thomas Kenny
Senior Vice President and Portfolio Manager
Mr. Kenny joined Advisers in 1986, and is currently Director of the Municipal
Bond Department. He has been responsible for making portfolio recommendations
and decisions for the Fund since August 1994. He received a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara and Master of Science degree in Finance from Golden Gate University. He
is a member of several municipal securities industry related committees and
associations.
John B. Pinkham
Vice President and Portfolio Manager
Mr. Pinkham has been responsible for portfolio recommendations and decisions for
the Fund since joining Advisers in 1985. He has a Bachelor of Science degree in
Business from Columbia University and has been in the securities industry since
1956. He is a member of the Financial Analysts Federation.
John Pomeroy
Portfolio Manager
Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Fund since the beginning of 1993. He joined Advisers in 1986. He has a
Bachelor of Arts degree in Business Administration from San Francisco State
University, and is a member of industry related committees and associations.
Special Factors Affecting
an Investment in the Fund
This section briefly summarizes certain general economic and political risks
which could affect the Fund, in view of the Fund's policy of concentrating its
investments in securities issued by public entities in New York. The discussion
below is not intended to be comprehensive or to express any opinion on the
future course of political or economic events. In addition, it should be read in
the context of the Fund's other investment policies, including among others its
policies regarding securities ratings and diversification. (See "Investment
Objective and Policies of the Fund" above.) The discussion is based on
information from official statements relating to securities offerings of New
York issuers, from independent municipal credit reports and other sources
believed to be reliable, but has not been independently verified by the Fund.
Risk Factors of New York Issuers
New York State. New York state ("State"), the third-largest state in the U.S. in
terms of population, has historically been one of the wealthiest and most
economically diverse states as well. The State's economic health is dependent to
a significant extent on the fortunes of New York City ("City"), the largest city
in the nation, and the City's metropolitan area (which spreads into New Jersey
and Connecticut as well).
The State's economy was adversely affected by the recession of the early 1990s,
which lasted longer in the State causing the State economy to lag behind the
national economy. The economy, which exhibited signs of strength in the service,
construction and trade sectors, had significant cutbacks in the manufacturing,
utility, defense, computer and banking industries. In 1995 the State enacted a
tax-reduction program designed to spur economic growth and provide relief for
low and middle-income tax payers. This program will reduce personal income tax
by 20% over a three-year period.
In fiscal 1995 (ended March 31), the State saw a general fund operating deficit,
which could have been significantly higher if the State had not been able to
reduce spending by almost $850 million. The 1996 budget, which is the first to
be enacted under the new administration, projects an absolute year-over year
decline in general fund disbursements. Nominal spending from all State funding
sources, excluding federal aid, is proposed to increase by only 2.5% from fiscal
1995, in contrast to the prior decade when such spending growth averaged more
than 6% per annum.
Based on the 1995 enacted budget, a $5 billion gap in the State Financial Plan
is projected to be closed, through a series of actions, such as cost
containment, disbursement reestimates, other savings in social welfare programs,
including Medicaid, income maintenance and family programs, and reduction on the
State workforce.
Certain agencies, authorities and subdivisions of the State, such as the New
York State Urban Development Corporation ("UDC") and the Housing Finance Agency
("HFA"), depend on continued financial support from the State in order to meet
their obligations under outstanding debt securities. The State's support may
come in the form of appropriations, guarantees, lease-purchase arrangements,
other contractual obligations or moral obligation provisions, many of which
require appropriations by the legislature before any payments can be made.
Failure of the State to appropriate necessary amounts or to take other action to
permit the authorities and agencies to meet their obligations could result in
their default.
Constitutional challenges to State laws or appropriations could limit the amount
of taxes which the State or political subdivisions may impose on real property,
or the amounts these entities may borrow. For example, in 1979, the State's
highest court declared unconstitutional a state law allowing localities and
school districts to impose a special increase in real estate property taxes in
order to raise funds for pensions and other uses. However, in 1994, the State's
highest court rejected a taxpayer challenge to constitutionality of certain debt
incurred by State agencies without voter approval. Final adverse decisions in
cases of this nature could require extraordinary appropriations or expenditure
reductions, or both, and could have a material adverse effect upon the financial
condition of the State and various of its agencies and subdivisions.
New York City. In 1975, New York City ("City") suffered several financial crises
which impaired the borrowing ability of both the City and the State. In that
year, the City lost access to public credit markets, and it was not able to sell
short-term notes to the public until 1979 nor long-term debt to the public until
1981. The City required financial assistance from the State (through the
Municipal Assistance Corporation ("MAC")) and the federal government to resolve
these difficulties. Since 1975, the City's financial condition has been subject
to oversight and review by the New York State Financial Control Board (the
"Control Board") and since 1978 its financial Statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City was required to submit annually to the Control Board a financial plan for
the next four fiscal years, covering the City and certain agencies showing
balanced budgets determined in accordance with generally accepted accounting
principles. Although the Control Board's powers of prior approval were suspended
effective June 30, 1986, because the City had satisfied certain statutory
conditions, the City continues to submit four-year plans to the Control Board
for its review. In the event the City cannot obtain a balanced budget, there are
concerns as to whether any deficit in the City budget can be financed by MAC
bonds, federal guarantees, federal and State aid and increased revenues. Neither
the State nor the federal government is obligated to provide financial
assistance of any kind to the City in the event of future financial
difficulties. The City is also a defendant in numerous legal actions which
relate to material matters.
Projections for the City's fiscal year 1996 estimate a budget deficit of $2
billion, most of which is expected to result from shortfalls in projected tax
revenues and state aid. Efforts to close this gap will focus on reductions and
spending cuts in the areas of welfare and health-care entitlements, and cuts in
City services and personnel. The City projects significant budget deficits
through fiscal 1998.
Conclusion. Both the State and City face potential economic problems which could
seriously affect the ability of both the State and City to meet their financial
obligations. The economic problems of the City adversely affect the State in
numerous ways. In addition, for decades the State economy has grown more slowly
than that of the nation as a whole, resulting in a decline in the position of
New York as one of the country's wealthiest states. The causes of this decline
are varied and complex and some causes reflect international and national trends
beyond the State's and City's control. Some analysts feel that this long-term
decline is the result of State and local taxation, which is among the highest in
the nation, and which may cause corporations to locate outside the State. The
current high level of taxes may limit the ability of the State and City to
impose higher taxes in the event of future difficulties.
FRANKLIN
NEW YORK TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 OCTOBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
The Fund's Investment Objective
and Policies (See also the Prospectus
"Investment Objective and Policies
of the Fund")..................... 2
Officers and Directors............ 6
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")..................... 9
Plan of Distribution.............. 10
The Fund's Policies Regarding
Brokers Used on Portfolio
Transactions 12
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")....... 12
The Fund's Underwriter............ 15
Additional Information
Regarding Taxation (See also the
Prospectus "Taxation of the Fund
and Its Shareholders")............ 16
General Information............... 17
Financial Statements.............. 21
Appendix.......................... 21
Franklin New York Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company. Its investment objective is to provide
as high a level of dividend income which is exempt from federal, New York state
and New York City income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The Fund will seek to achieve
this investment objective through investing primarily in long-term New York
state municipal and public authority debt obligations. Investments in municipal
securities will be within the four highest ratings of either Moody's Investors
Service ("Moody's"), Standard & Poor's Corporation ("S&P")or Fitch Investors
Service, Inc. ("Fitch") or in unrated securities which, in the opinion of the
Fund's investment manager, are of comparable quality to such four highest
ratings, at the time of investment. Normally, except for temporary defensive
purposes, at least 80% of the Fund's assets will be invested in tax-exempt
municipal securities.
A Prospectus for the Fund dated October 1, 1995, as may be amended from time to
time, provides the basic information an investor should know before investing in
the Fund, and may be obtained without charge from the Fund or from its principal
underwriter, Franklin Templeton Distributors, Inc. ("Distributors"), at the
address listed above.
As explained in the Prospectus, this Fund offers two classes of shares to its
investors: Franklin New York Tax-Free Income Fund - Class I ("Class I") and
Franklin New York Tax-Free Income Fund - Class II ("Class II"). This new
multiclass structure allows investors to consider, among other features, the
impact of upfront sales charges and distribution fees ("Rule 12b-1 fees") on
their investments in this Fund.
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide investors with additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Fund's Prospectus.
The Fund's Investment Objective and Policies
As noted in the Prospectus, the investment objective of the Fund is to provide
as high a level of dividend income to shareholders which is exempt from federal,
New York state and New York City income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. (See "Investment
Objective and Policies of the Fund" in the Prospectus.)
Although the Fund seeks to invest all of its assets in a manner designed to
accomplish its objective, there may be times when market conditions limit the
availability of appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. For temporary defensive
purposes, the Fund may invest more than 20% and up to 100% of the value of its
net assets in instruments the interest on which is exempt from federal income
taxes only, and the Fund may invest more than 20% of its assets (which could be
up to 100%)in fixed-income obligations, the interest on which is subject to
federal income tax and (ii) the Fund may invest more than 20% of the value of
its net assets (which could be up to 100%) in instruments the interest on which
is exempt from federal income taxes but not that state's personal income taxes.
Ratings
The ratings of Moody's, S&P and Fitch represent their respective opinions of the
qualities of the securities they undertake to rate and such ratings are general
and are not absolute standards of quality. On May 31, 1995, 100% of the Fund's
invested assets were invested in tax-exempt securities of which 21.0% had a
triple-A rating by Moody's, Standard & Poor's or Fitch; 16.3% a double-A by
Moody's, Standard & Poor's or Fitch; 22.0% had a rating of single-A by Moody's,
Standard & Poor's or Fitch; 34.1% had a rating of triple-B requirement by
Moody's, Standard & Poor's or Fitch; 1.0% had a rating of double-B by Moody's,
Standard & Poor's or Fitch; 0.9% had a rating of single-B by Moody's, Standard &
Poor's or Fitch. No portion of the invested assets of the Fund were invested in
unrated securities. An explanation of these ratings is set forth in the Appendix
hereto.
Municipal Securities
The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which the Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or fully insured
mortgages, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Many bonds provide additional
security in the form of a debt service reserve fund, from which money may be
used to make principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of state assurance
(although without obligation) to make up deficiencies in the debt service
reserve fund.
Industrial Development Revenue Bonds. These are, in most cases, revenue bonds
and are issued by or on behalf of public authorities to raise money for the
financing of various privately operated facilities for business manufacturing,
housing, sports, and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is solely dependent on
the ability of the facilities user to meet its financial obligations and the
pledge, if any, of the real and personal property so financed as security for
such payment. The Fund will purchase Industrial development revenue bonds only
to the extent that the interest paid by a particular bond is tax-exempt pursuant
to the Tax Reform Act of 1986, which limited the types of facilities that may be
financed with tax-exempt industrial development and private activity bonds and
the amounts of such bonds each state may issue.
Variable or Floating Rate Demand Notes ("VRDNs"). VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period (generally up to 30
days) prior to specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily up
to monthly, calculated to maintain the market value of the VRDN at approximately
the par value of the VRDN upon the adjustment date. The adjustments are
typically based upon the prime rate of a bank or some other appropriate interest
rate adjustment index.
When-Issued Purchases. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place after the date that the offer is
accepted. The purchase price and the yield that will be received on the
securities are fixed at the time the buyer enters into the commitment. While the
Fund will always make commitments to purchase such securities with the intention
of actually acquiring the securities, it may nevertheless sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, they would earn no income; however, it
is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time the Fund makes the
commitment to purchase a municipal bond on a when-issued basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The Fund does not believe that its net asset value or income will
be adversely affected by the purchase of municipal bonds on a when-issued basis.
The Fund will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Municipal securities may also be sold in "stripped" form. Stripped Municipal
Securities represent separate ownership of interest and principal payments on
municipal obligations.
Callable Bonds. In the early 1980s large numbers of municipal bonds were issued
with provisions which prevented their being called, typically for periods of 5
to 10 years. During the coming years that protection will end on many issues.
During times of generally declining interest rates, if the call-protection on
callable bonds expires, there is an increased likelihood that a number of such
bonds may, in fact, be called away by the issuers. Based on a number of factors,
including certain portfolio management strategies used by the Fund's investment
manager, the Fund believes it has reduced the risk of adverse impact on net
asset value based on calls of callable bonds. The investment manager may dispose
of such bonds in the years prior to their call date, if the investment manager
believes such bonds are at their maximum premium potential. In pricing such
bonds in the Fund's portfolio, each callable bond is marked to the market daily
based on the bond's call date. Thus, the call of some or all of the Fund's
callable bonds may have an impact on its net asset value. In light of the Fund's
pricing policies and because the Fund follows certain amortization procedures
required by the Internal Revenue Code, the Fund is not expected to suffer any
material adverse impact related to the value at which the Fund has carried the
bonds in connection with calls of bonds purchased at a premium. Notwithstanding
such policies, however, the re-investment of the proceeds of any called bond may
be in bonds which pay a higher or lower rate of return than the called bonds;
and as with any investment strategy, there is no guarantee that a call may not
have a more substantial impact than anticipated or that the Fund's objectives
will be achieved.
Certificates of Participation. As stated in the Prospectus, the Fund may also
invest in municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that the
lease which is the subject of the transaction typically contains a
"nonappropriation" or "abatement" clause. A nonappropriation clause provides
that, while the municipality will use its best efforts to make lease payments,
the municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only COPs rated
within the four highest rating categories of Moody's, S & P, or Fitch, or in
unrated COPs believed by the Fund's investment manager to be of comparable
quality. Criteria considered by the rating agencies and the Fund's investment
manager in assessing such risk include the issuing municipality's credit rating,
the essentiality of the leased property to the municipality and the term of the
lease compared to the useful life of the leased property. The Board of Directors
has determined that COPs held in the Fund's portfolio constitute liquid
investments based on various factors reviewed by the investment manager and
monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated; (b) the size of the municipal
securities market for the Fund, both in general and with respect to COPs; and
(c) the extent to which the type of COPs held by the Fund trade on the same
basis and with the same degree of dealer participation as other municipal bonds
of comparable credit rating or quality. There is no limit as to the amount of
assets which the Fund may invest in COPs.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow-secured bonds will often
receive a triple-A rating from S&P and Moody's Investors Service ("Moody's").
U.S. Government Obligations which may be owned by the Fund are issued by the
U.S. Treasury and include bills, certificates of indebtedness, notes and bonds,
or are issued by agencies and instrumentalities of the U.S. government and
backed by the full faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Fund may also invest, to the extent such investments would be
consistent with the foregoing objective and policies.
Timing of Securities Transactions
The Fund may purchase or sell securities without regard to the length of time
the security has been held to take advantage of short-term differentials in bond
yields consistent with its objective of seeking interest income while conserving
capital. While short-term trading increases the portfolio turnover, the
execution costs for municipal bonds are substantially less than those for
equivalent dollar values of equity securities. The Fund's portfolio turnover
rates are shown in the "Financial Highlights" table in the Prospectus.
Diversified Fund
As a diversified fund, the Fund is subject to the following restriction. With
respect to 75% of its net assets, the Fund, except as stated below, may not
purchase a security if, as a result of the investment, more than 5% of its total
assets would be in the securities of any single issuer (with the exception of
obligations of the U.S. government). The Fund's policy, as described in the
prospectus, applies the 5% limitation of 100% of the Fund's total assest. For
this purpose, each political subdivision, agency, or instrumentality and each
multi-state agency of which a state is a member, and each public authority which
issues private activity bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of the Fund's portfolio. A
bond for which the payments of principal and interest are secured by an escrow
account of securities backed by the full faith and credit of the U.S. government
("defeased"), in general, will not be treated as an obligation of the original
municipality for purposes of determining issuer diversification.
Defeased bonds may be excluded from issuer diversification calculations only
under the following conditions. Only U.S. government securities may be deposited
into the escrow account. The deposit must be irrevocable and pledged only to the
debt service of the underlying bonds, so that the deposited securities will not
be subject to the claims of other creditors of the issuer, even in the case of
economic defeasance. The escrow agent may not be an affiliated person of the
issuer or an affiliated person of an affiliated person of the issuer within the
meaning of section 2(a)(3) of the Investment Company Act of 1940 ("1940 Act"),
and may not have a lien of any type on the deposited securities for payment of
its fees, except with respect to excess securities. An independent certified
public accountant, counsel to holders of the original bond, or other party
acceptable to a nationally recognized statistical rating agency, must verify at
the time of the initial deposit of securities and at the time any substitute
securities are deposited into the escrow account, that the securities will
satisfy all scheduled principal, interest, and any applicable premiums on the
original bonds. The Fund will invest no more than 25% of its total assets in
refunded bonds of the same municipal issuer.
Investment Restrictions and Policies
Restrictions - The Fund has adopted the following additional restrictions as
fundamental policies, which means that they may not be changed without the
approval of a majority in interest of the Fund's shares. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a portion of
an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan. Although such loans are not presently intended, this prohibition will
not preclude the Fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower; provided such 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.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which any
officer or director is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment adviser, own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and directors together
own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. 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. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the Fund and, therefore, there are no option transactions available for the
Fund.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except to the extent the
Fund invests its uninvested daily cash balances in shares of Franklin New York
Tax-Exempt Money Fund and other tax-exempt money market funds in the Franklin
Group of Funds provided i) its purchases and redemptions of such money market
fund shares may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and iii)
provided aggregate investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.
11. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.
With respect to the limits set forth in Restrictions (1) and (3) above, it
should be noted that the Fund has not in the past, nor does it intend in the
future, to engage in either of those investment techniques to any extent.
In order to change any of the foregoing restrictions, or any other fundamental
policies listed in the Prospectus, approval must be obtained from the Fund's
shareholders. Such approval requires the affirmative vote of the lesser of (i)
67% or more of the Fund's voting securities present at a meeting if the holders
of more than 50% of the Fund's voting securities are represented at that meeting
or (ii) more than 50% of the Fund's outstanding voting securities.
In response to state requirements:
(1) the Fund will not invest in real estate limited partnerships or in interests
(other than publicly traded equity securities) in oil, gas, or other mineral
leases, exploration or development;
(2) the Fund may not invest in warrants (valued at the lower of cost or market)
in excess of 5.0% of the value of the Fund's net assets. No more than 2.0% of
the value of the Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American Stock
Exchanges. Warrants acquired by the Fund in units or attached to securities may
be deemed to be without value.
Officers and Directors
The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"), are
indicated by an asterisk (*).
Harris J. Ashton President
Age 63
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company), and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato Director
Age 63
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson Chairman
Age 62 of the Board
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 56 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. President
Age 55 and Director
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin Director
Age 67
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 52 of the investment companies in the Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare
Investors; and formerly President, National Association of Securities Dealers,
Brian E. Lorenz Secretary
Age 56
One North Lexington Avenue
White Plains, New York 10001-1700
Attorney, member of the law firm of Bleakley Platt & Schmidt; officer of 3 of
the investment companies in the Franklin Templeton Group of Funds
Harmon E. Burns Vice President
Age 50
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 42 of the investment companies in the Franklin Templeton Group of Funds.
John Pinkham Vice President
Age 65
16 South Main Street
Norwalk, CT 06854
Vice President of Franklin Advisers, Inc. in portfolio management capacities.
Kenneth V. Domingues Vice President -
Age 62 Financial Reporting
777 Mariners Island Blvd. and Accounting
San Mateo, CA 94404 Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and Officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Deborah R. Gatzek Vice President
Age 46
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of all
the investment companies in the Franklin Group of Funds. Directors not
affiliated with the investment manager ("nonaffiliated directors") are currently
paid fees of $800.00 per month plus $800.00 per meeting attended. As indicated
above, certain of the Fund's nonaffiliated directors also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Group of Funds(R) and the Templeton Group of Funds (the "Franklin
Templeton Group of Funds") from which they may receive fees for their services.
The following table indicates the total fees paid to nonaffiliated directors by
the Fund and by other funds in the Franklin Templeton Group of Funds
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received Franklin Templeton of Funds on which
Name from Fund* Group of Funds** Each Serves***
Harris J. Ashton..........$19,200 $319,925 55
S. Joseph Fortunato.......$19,200 $336,065 57
Gordon S. Macklin.........$19,200 $303,685 52
*For the fiscal year ended May 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 162 U.S.
based mutual funds or series.
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. Legal fees and expense reimbursements of $27,791 were paid during the
fiscal year ended May 31, 1995, to the law firm of which Mr. Lorenz is a
partner, and which acts as counsel to the Fund. No officer or director received
any other compensation directly from the Fund. Certain officers or directors who
are shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries. For additional information concerning director compensation and
expenses, please see the Fund's Annual Report to Shareholders.
As of July 5, 1995, the directors and officers, as a group, owned of record and
beneficially approximately 20,256 shares, or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.
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. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding common stock.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries which are involved in
investment management and shareholder services. The Manager and other subsidiary
companies of Resources currently manage over $125 billion in assets world wide
for over 3.8 million shareholders in addition to foundations, endowments,
employee benefit plans and individuals. The preceding table indicates those
officers and directors who are also affiliated persons of Distributors and of
Advisers.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's extensive research
activities include, as appropriate, traveling to meet with issuers and to review
project sites. The Manager's activities are subject to the review and
supervision of the Fund's Board of Directors to whom the Manager renders
periodic reports of the Fund's investment activities. The Manager, at its own
expense, furnishes the Fund with office space and office furnishings, facilities
and equipment required for managing the business affairs of the Fund; maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services; and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers, directors and
employees for the protection of the Fund. The Fund bears all of its expenses not
assumed by the Manager.
See the Statement of Operations in the financial statements at the end of this
SAI for additional details of these expenses.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the
first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2 of
1% per year) on net assets of the Fund in excess of $100 million up to $250
million; 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of the
Fund in excess of $250 million up to $10 billion; 11/300 of 1% (approximately
44/100 of 1% per year) of net assets of the Fund in excess of $10 billion up to
$12.5 billion; 7/200 of 1% (approximately 42/100 of 1% per year) of net assets
of the Fund in excess of $12.5 billion up to $15 billion; 1/30 of 1%
(approximately 40/100 of 1% per year) of net assets of the Fund in excess of $15
billion up to $17.5 billion; 19/600 of 1% (approximately 38/100 of 1% per year)
of net assets of the Fund in excess of $ 17.5 billion up to $20 billion; and
3/100 of 1% (approximately 36/100 of 1% per year) of net assets of the Fund in
excess of $20 billion.
Management fees for the fiscal years ended May 31, 1993, 1994 and 1995 were
$18,100,051, $21,149,935, and $20,769,558 respectively.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 1.5% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state limitation requirements.
The management agreement is in effect until September 30, 1996. Thereafter, it
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Fund's Board of
Directors or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's
directors who are not parties to the management agreement or interested persons
of any such party (other than as directors of the Fund), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Fund or by the Manager on 30 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
Franklin Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
rate fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended May 31, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report and this SAI.
Plan of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I Plan" and
"Class II Plan," respectively, or "Plans") pursuant to Rule 12b-1 under the 1940
Act.
The Class I Plan
Pursuant to the Class I Plan, the Fund may pay up to a maximum of 0.10% per
annum of its average daily net assets for expenses incurred in the promotion and
distribution of its shares. In implementing the Class I Plan, the Board of
Directors determined that the annual fees payable thereunder will be equal to
the sum of: (i) the amount obtained by multiplying 0.10% by the average daily
net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994 ("New Assets"), and (ii) the amount obtained
by multiplying 0.05% by the average daily net assets represented by Class I
shares of the Fund that were acquired before May 1, 1994 ("Old Assets"). Such
fees will be paid to the current securities dealer of record on the
shareholder's account. In addition, until such time as the maximum payment of
0.10% is reached on a yearly basis, up to an additional 0.01% will be paid to
Distributors under the Plan. The payments to be made to Distributors will be
used by Distributors to defray other marketing expenses that have been incurred
in accordance with the Plan, such as advertising.
The fee relating to the Class I Plan is an expense of Class I as a whole, so
that all Class I shareholders, regardless of when they purchased their shares
will bear Rule 12b-1 expenses at the same rate. That rate initially will be at
least 0.06% (0.05% plus 0.01%) of Class I's average daily net assets and, as
Class I shares are sold on or after May 1, 1994, (the "Effective Date") will
increase over time. Thus, as the proportion of Class I shares purchased on or
after May 1, 1994 increases in relation to outstanding Class I shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan, the Class I
Plan permits the Fund's directors to allow the Fund to pay a full 0.10% on all
assets at any time. The approval of the Fund's Board of Directors would be
required to change the calculation of the payments to be made under the Class I
Plan.
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of Class I shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Class I shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
The Class II Plan
Under the Class II Plan, the Fund pays to Distributors annual distribution fees,
payable quarterly, of up to 0.50% of Class II's average daily net assets. Such
fees may be used in order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of the Class. All
expenses of distribution and marketing over that amount will be borne by
Distributors, or others who have incurred them, without reimbursement by the
Fund. In addition to this amount, under the Class II Plan, the Fund shall pay up
to 0.15% per annum, payable quarterly of the Class' average daily net assets as
a servicing fee. This fee will be used to pay dealers or others for, among other
things, assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of the
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
In General
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide 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 payments for the financing of
any activity primarily intended to result in the sale of each class of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not be
entitled to participate in the Plans to the extent that applicable federal law
prohibits certain banks from engaging in the distribution of mutual fund shares.
Such banking institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans are effective through April 30, 1996, and are renewable annually by a
vote of the Fund's Board of Directors, including a majority vote of the
directors who are non-interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plans, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such directors be done by the non-interested directors. The Plans
and any related agreement may be terminated at any time, without any penalty, by
vote of a majority of the non-interested directors on not more than 60 days'
written notice, by Distributors on not more than 60 days' written notice, by any
act that constitutes an assignment of the management agreement with the Manager,
or by vote of a majority of the Fund's outstanding shares. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of such class of the Fund's outstanding shares, and all
material amendments to the Plans or any related agreements shall be approved by
a vote of the non-interested directors, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board of Directors at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Directors with such other
information as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plan should be
continued.
For the fiscal year ended May 31, 1995 the total amounts paid by the fund
pursuant to the Plans for Class I and Class II shares were $2,799,576 and $303,
respectively, which were used for the following purposes:
Dollar Amount
Payments to Dealers........ $2,347,359
Advertising................ $ 199,773
Printing and mailing of
prospectuses to other than
current shareholders...... $ 128,095
Payments to underwriters... $ 124,652
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Fund are principal transactions at net prices,
the Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or purchasing principal or market maker without incurring charges for
the services of a broker on its behalf unless it is determined that a better
price or execution may be obtained by utilizing the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. As a general rule, the Fund
does not purchase bonds in underwritings where it is not given any choice, or
only limited choice, in the designation of dealers to receive the commission.
The Fund seeks to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services rendered by such
dealers in the execution of orders. It is not possible to place a dollar value
on the special executions or on the research services received by Advisers from
dealers effecting transactions in portfolio securities. The allocations of
transactions in order to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staff of other securities firms. As long
as it is lawful and appropriate to do so, the Manager and its affiliates may use
this research data in their investment advisory capacities with other clients.
Provided that the Fund's officers are satisfied that the best execution is
obtained, the sale of Fund shares may also be considered as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended May 31, 1995, the Fund paid no
brokerage commissions.
As of May 31, 1995, The Fund did not own any securities of its regular
broker-dealers.
Additional Information
Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the Fund into which the Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
for shares of any of the investment companies will be effected at the close of
business on the day the request for exchange is received in proper form at the
net asset value then effective.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submnits a check
or a draft which is returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares of the
Fund will be offered with the following schedule of sales charges:
Sales
Size of Purchase in U.S. Dollars Charge
Up to $100,000................. 3%
$100,000 to $1,000,000......... 2%
Over $1,000,000................ 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled closing of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the close of the Exchange will be effected at the Fund's public offering
price on the day it is next calculated. The use of the term "securities dealer"
herein shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value
Purchases - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the Fund -
Description of Special Net asset Value Purchases," certain categories of
investors may purchase Class I shares of the Fund without a front-end sales
charge ("net asset value") or a contingent deferred sales charge. Distributors
or its affiliates may make a payment, out of its own resources, to securities
dealer who initiate and are responsible for such purchases, as indicated below.
Distributors may make these payments in the form of of contingent advance
payments, which may be recovered from the securities dealer, or set off against
other payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following purchase.
Other conditions may apply. All terms and conditions may be imposed by an
agreement between Distributors, or its affiliates, and the securities dealer.
Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of Class I shares of the Fund, as described in the Prospectus. At any
time within 90 days after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund. After the Letter
of Intent is filed, each additional investment will be entitled to the sales
charge applicable to the level of investment indicated on the Letter of Intent.
Sales charge reductions based upon purchases in more than one of the Franklin
Templeton Funds will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's holdings in the
Franklin Templeton Funds, including Class II shares, acquired more than 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
in the sales charge. Any redemptions made by the shareholder during the 13-month
period will be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter of Intent have been completed. If
the Letter of Intent is not completed within the 13-month period, there will be
an upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. An investor who executes a
Letter of Intent prior to a change in the sales charge structure for the Fund
will be entitled to complete the Letter of Intent at the lower of (i) the new
sales charge structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name. If the total purchases, less redemptions, equal the amount
specified under the Letter of Intent, the reserved shares will be deposited to
an account in the name of the investor or delivered to the investor or the
investor's order. If the total purchases, less redemptions, exceed the amount
specified under the Letter of Intent and equal an amount which would qualify for
a further quantity discount, a retroactive price adjustment will be made by
Distributors and the securities dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter of Intent.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter of Intent, the investor will
remit to Distributors an amount equal to the difference in the dollar amount of
sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single time. The shareholder will receive a written notification from
Distributors requesting the remittance. Upon such remittance the reserved shares
held for the investor's account will be deposited to an account in the name of
the investor or delivered to the investor or to the investor's order. If within
20 days after written request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to the investor.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks Distributors, or one of its affiliates, out of its
own resources, may pay up to 1% of the amount invested.
General
Redemptions will be made in cash at the net asset value per share next
determined after receipt by the Fund of a redemption request in proper form,
including all share certificates, share assignments, signature guarantees and
other documentation as may be required by the transfer agent. The amount
received upon redemption may be more or less than the shareholder's original
investment.
The Fund will make payment for all redemptions within seven days after receipt
of such redemption request in proper form. However, the Fund reserves the right
to suspend redemptions or postpone the date of payment (1) for any periods
during which the Exchange is closed (other than for the customary weekend and
holiday closings), (2) when trading in the markets that the Fund usually
utilizes is restricted or an emergency exists, as determined by the Securities
and Exchange Commission ("SEC"), so that disposal of such Fund's investments or
the determination of such Fund's net asset value is not reasonably practicable,
or (3) for such other periods as the SEC may permit by order for the protection
of investors. Also, the Fund will not mail redemption proceeds until checks
received for the shares purchased have cleared.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the directors reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund does not intend to
redeem illiquid securities in kind; however, should it happen, shareholders may
not be able to timely recover their investment and may also incur brokerage
costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net asset value of
each class as of the scheduled closing of the Exchange (generally 1:00 p.m.
Pacific time) each day that the Exchange is open for trading. As of the date of
this SAI, the Fund is informed that the Exchange observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times prior to the close of the
Exchange. The values of such securities used in computing the net asset value of
the Fund's shares are determined as of such times. Occasionally, events
affecting the values of such securities may occur between the time at which they
are determined and the scheduled closing of the Exchange which will not be
reflected in the computation of net asset value of the Fund's shares. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Board of Directors.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month, and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semi-annual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800 DIAL
BEN.
Special Services
The Fund and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions, which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping, operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until September 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive annual periods
provided that its continuance is specifically approved at least annually by a
vote of the Fund's Board of Directors, or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Fund's directors who are not parties to the underwriting agreement
or interested persons of any such party (other than as directors of the Fund),
cast in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.
Until April 30, 1994, income dividends for the Class I shares were reinvested at
the offering price (which includes the sales charge) and Distributors allowed
50% of the entire commission to the securities dealer of record, if any, on an
account. Starting with any income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
In connection with the offering of the shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1993, 1994 and 1995 were
$26,371,833, $24,747,692, and $13,734,072 respectively. After payments to
dealers, Distributors retained $1,840,740, $1,876,562, and $794,358 for the
respective periods. Distributors may be entitled to reimbursement under the
distribution plan relating to Class I shares as discussed in "Plans of
Distribution". Except as noted, Distributors received no other compensation from
the Fund with respect to the Class I shares for acting as underwriter.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Directors reserve the
right not to maintain the qualification of the Fund as a regulated investment
company if they determine such course of action to be beneficial to the
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
its tax-exempt interest dividends) to shareholders will be taxable to the extent
of the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but does not guarantee that its distributions
will be sufficient to avoid any or all federal excise taxes.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Group of Funds and the Templeton Group
and a sales charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the tax basis of the
shares sold will be added to the tax basis of the shares acquired in the
reinvestment. Shareholders should consult with their tax advisors concerning the
tax rules applicable to the redemption or exchange of fund shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
May 31, 1995 qualified for this deduction and it is not anticipated that any of
the current year's dividends will so qualify.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. While it is not the primary investment objective of this
Fund to invest in such obligations, the Fund is authorized to so invest for
temporary or defensive purposes. To the extent that such investments are made,
the Fund will provide shareholders with the percentage of any dividends paid
which may qualify for such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with respect to the
application of their state and local laws to these distributions and on the
application of other state and local laws on distributions and redemption
proceeds received from the Fund.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of the Fund.
General Information
Performance
As noted in the Prospectus, each class may from time to time quote various
performance figures to illustrate its past performance. Each class also may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
class be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations used by a class are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the classes to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period, and the deduction
of all applicable charges and fees. If a change is made in the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge currently in effect.
In considering the quotations of total return by the Fund, investors should
remember that the maximum 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 an investor's investment in the Fund. The actual performance
of an investment will be affected less by this charge the longer an investor
retains the investment in the Fund. The average annual compounded rates of
return for the Class I shares of the Fund for the indicated periods ended on the
date of the financial statements included herein was as follows:
Period Ending May 31, 1995:
One-Year: 2.55%
Five-Year: 7.82%
Ten-Year: 8.71%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-, five-
or ten-year periods.
As discussed in the Prospectus, each class may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Class I shares of
the Fund for the one-, five-, and ten-year periods ended on the date of the
financial statements included herein were 2.55%, 43.68% and 130.55%,
respectively. The total rate of return for the Class II shares of the fund since
inception is 0.51%.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield for each class is determined by dividing the net investment income
per share earned by the class during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of a class during the base period. The yield for Class I shares for
the 30-day period ended on the date of the audited financial statements included
herein was 5.15%. The yield for Class II shares for the 30-day period ended on
the date of the audited financial statements included herein was 4.93%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Tax Equivalent Yield
The Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. Such yield is computed by dividing that
portion of the yield of the Fund (computed as indicated above) which is
tax-exempt by one minus the highest applicable combined federal, state and New
York City income tax rate (and adding the product to that portion of the yield
of the Fund that is not tax-exempt, if any). The tax equivalent yield for the
Class I shares of the Fund for the 30-day period ended on the date of the
financial statements included herein was 9.70%. The tax equivalent yield for the
Class II shares of the Fund for the 30-day period ended on the date of the
financial statements included herein was 9.28%. The advertised tax-equivalent
yield will reflect the most current federal, New York state and New York City
tax rates available to the Fund.
As of the date of this SAI, the state, the combined state and federal, and the
combined effective New York City, state and federal income tax rates upon which
the Fund's tax equivalent yield quotations are based are 7.6%, 44.2% and 46.9%,
respectively. From time to time, as any changes to such rates become effective,
tax equivalent yield quotations advertised by the Fund will be updated to
reflect such changes. The Fund expects updates may be necessary as tax rates are
changed by federal, state and local governments. The advantage of tax-free
investments, such as the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
Quotations of taxable equivalent yield by the Fund in advertisements may reflect
assumed rates of return which are not intended to represent historical or
current distribution rates or yields. Such quotations will be used in sales
literature, such as Franklin's Tax-Free Yield Calculator, to illustrate the
general principle of the impact taxes have on rates of return or to show the
taxable rate of return that would be needed to match a tax-free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC are not indicative of the amounts which were or
will be paid a class' shareholders. Amounts paid to shareholders are reflected
in the quoted current distribution rate or taxable equivalent distribution rate.
The current distribution rate is computed by dividing the total amount of
dividends per share paid by a class during the past 12 months by a current
maximum offering price. A taxable equivalent distribution rate demonstrates the
taxable distribution rate equivalent to the class'current distribution rate
(calculated as indicated above). The advertised taxable equivalent distribution
rate will reflect the most current federal, New York state and New York City tax
rates available to the Fund. Under certain circumstances, such as when there has
been a change in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
over the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as short-term capital
gains, and is calculated over a different period of time.
The current distribution rate and the current tax-equivalent distribution rate
for Class I shares for the 12-month period ended on the date of the financial
statements included herein was 6.16% and 11.60%, respectively. And for Class II
shares 5.77% and 10.87% respectively.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
Class I shares at net asset value, sales literature pertaining to such class may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering price.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds and classes belonging
to the Templeton Group of Funds. Franklin Resources, Inc. is the parent company
of the advisers and underwriter of both the Franklin Group of Funds and
Templeton Group of Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund and class performance as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices, and
averages. Such comparisons may include, but are not limited to, the following
examples:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Smith Barney, Shearson Donoghue's Money Fund Report Industry averages for
7-day annualized and compounded yields of taxable, tax-free and government money
funds.
d) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices - LBMBI
measures yield, price and total return for the municipal bond market.
e) Bond Buyer's 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
g) Bond Buyer's Municipal Bond Index - an index based on the yields of 40
long-term, tax-exempt municipal bonds. Designed to be the basis for the
Municipal Bond Index futures contract.
h) Bond Buyer's 40 Average Dollar Price - a simple average of the current
average dollar bid prices of the 40 bonds in the Bond Buyer's Municipal Bond
Index.
i) Mutual Fund Sourcebook, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
j) Financial publications: The Wall Street Journal and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
k) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, Long-Term Utility High-Yield Index.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
m) Lipper - Mutual Fund Performance Analysis; Lipper - Fixed Income Fund
Performance Analysis; and Lipper Mutual Fund Yield Report - measure total return
and average current yield for the mutual fund industry. Rank individual mutual
fund performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication. Advertisements or information may also compare the
Fund's or class' performance to the return on certificates of deposit or other
investments. Investors 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 certificate of deposit issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares which are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. Certificates of deposit are frequently insured by an
agency of the U.S. government. An investment in the Fund is not insured by any
federal, state or private entity.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition there can be no assurance that the Fund will continue this
performance as compared to such other averages.
Other Features and Benefits
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
costs and/or other long-term goals. The Franklin College Costs Planner may
assist an investor in determining how much money must be invested on a monthly
basis in order to have a projected amount available in the future to fund a
child's college education. (Projected college cost estimates are based upon
current costs published by the College Board.) The Franklin Retirement Planning
Guide leads an investor through the steps to start a retirement savings program.
Of course, an investment in the Fund cannot guarantee that such goals will be
met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 47 years and now services
more than 2.5 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin Templeton Group has over $125 billion in
assets under management for more than 3.8 million shareholder accounts and
offers 114 U.S.-based mutual funds. The Fund may identify itself by its NASDAQ
or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$40 billion in municipal bond assests for over half a million investors.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one
number one in service quality for five of the past seven years.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1994, taxes could cost as much as
$47 on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 1994.)
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 an investor
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 may also provide tax-free compounding, when
dividends are reinvested. An investment in Franklin's tax-free funds can grow
more rapidly than similar taxable investments.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked 2 out of 1,000 investment advisory
firms surveyed by TMS Holdings, Inc. As of November 14, 1994, this ranking was
unchanged. Also according to the May 31, 1995, report published by Lipper
Analytical Services, Inc., the Fund is still the largest New York municipal bond
fund in existence.
From time to time, advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
At Franklin, our objective is to offer tax-free funds through a professionally
managed portfolio of tax-free securities selected for attractiveness based on
their yield, quality and maturity. No matter where you live, you'll have 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 can be a way to participate in a portfolio of municipal
securities with the added advantage of tax-free compounding, when you reinvest
your dividends. As time passes, your investment can grow more rapidly than
similar taxable investments.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the IRS in response to a Notice of Levy.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated May 31, 1995, including the auditors' report, are incorporated
herein by reference.
Appendix
Description of Municipal Bond Ratings:
Moody's
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates and, hence, provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: Considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong although
not quite as strong as bonds rated AAA and not significantly vulnerable to
foreseeable future developments.
A bonds: Considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefor impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB bonds: Considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B bonds: Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
CCC bonds: Have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.
C bonds: Imminent default in payment of interest or principal.
DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
Rates bonds of issuers which have $600,000 or more of debt, except bonds of
educational institutions, projects under construction, enterprises without
established earnings records and situations where current financial data is
unavailable.
Rates all governmental bodies having $1,000,000 or more of debt outstanding,
unless adequate information is not available.
Municipal division handles requests from all types of domestic long- and
short-term tax-exempt issuers.
Description of Other Investments:
U.S. Government Obligations - are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. government are established under the authority of an act of Congress
and include, but are not limited to, the Government National Mortgage
Association, the Tennessee Valley Authority, the Bank for Cooperatives, the
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks and the Federal National Mortgage Association.
Certificates of Deposit - are certificates issued against funds deposited in a
commercial bank, are for a definite period of time, earn a specified rate of
return and are normally negotiable.
Bankers' Acceptances - are short-term credit instruments used to finance the
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
Commercial Paper - refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
Repurchase Agreements - involve purchase of obligations issued or guaranteed as
to interest and principal by the United States government or any agency or
instrumentality thereof or any federally-created corporation. At the same time
the Fund purchases the security, it resells it to the vendor (a member bank of
the Federal Reserve System) and is obligated to redeliver the security to the
vendor on an agreed-upon date in the future. The resale price is in excess of
the purchase price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn, at no market risk, a return on cash which is only
temporarily available. The Fund's risk is limited to the ability of the vendor
to pay an agreed-upon sum upon the delivery date.
