Franklin
New York Tax-Free
Income Fund
PROSPECTUS October 1, 1994
as amended July 14, 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, 1994, as supplemented May 1, 1995, and as may be further supplemented or
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 listed 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........................................... 4
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............................ 14
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................................. 32
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..................................... 37
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, 1994,
except as otherwise noted.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class I Class II
<S> <C> <C>
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%
Maximum Rule 12b-1 Fees............................................................................... 0.10%* 0.65%*
Other Expenses........................................................................................ 0.05 0.05%**
Total Fund Operating Expenses......................................................................... 0.61% 1.16%
-------- --------
</TABLE>
+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 following 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, 1994.
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 initial sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class I.................. $48* $61 $75 $115
Class II................. $32 $47 $73 $150
*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 $47 $73 $150
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, 1994. The
information for each of the five fiscal years in the period ended May 31, 1994
has been audited by Coopers & Lybrand L.L.P. independent auditors, whose audit
report appears in the financial statements in the Fund's SAI. The information
for the preceding five fiscal years ended May 31,1989, which are also audited,
are not covered by the auditors' current report. Also included is information
for the six-month period ended November 30, 1994, which is unaudited.
Information regarding Class II shares will be included in this table after they
have been offered to the public for a reasonable period of time. See also
"Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Distri- Distri- Net Ratio
Net Asset Net Realized butions butions From Asset Net Ratio of of Net Port-
Value Net & Unrealized Total From From Net Realized Value Assets Expenses Income to folio
Year Beginning Investment Gains(Losses)Investment Investment Capital at End Total at End to Average Average Turnover
Ended of Year Income on Securities Operations Income Gains of Year Return+ of Year Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994* $11.72 $0.37 $(0.742) $(0.372) $(0.378) $10.97 (3.29)%$4,346,329,186 0.58%+ 6.40%+ 14.97%
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
1985 9.43 0.95 1.070 2.020 (0.960) 10.49 22.23 527,482,837 0.60 8.86 26.47
</TABLE>
+Total Return
*For the six-month period ended November 30, 1994, (unaudited)
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 or which is treated as a tax preference item under the
federal alternative minimum 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 purchase floating rate and variable rate obligations. These
obligations bear interest at prevailing market rates. The Fund may also invest
in 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 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. In most cases, however, the private sector value of the property will
be 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.
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 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 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 that Fund. Since the Fund generally will invest
primarily in the securities issued by New York and 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 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 non-essential or 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 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 now hold and 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 the bonds were redeemed. 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
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.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (113 separate series) with aggregate assets of over $74 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, 1994, fees totaling 0.46% of the average
monthly net assets of Class I shares of the 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 on a "net" basis,
that is, in principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. To the extent 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 tries to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to provide the
best execution, the Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data for the Manager and
its affiliates, as well as the sale of shares of the Fund, as factors in
selecting a broker. Further information is included under "The Fund's Policies
Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended May 31, 1994, the expenses borne by Class I shares
of the Fund, including fees paid to Advisers and to Investor Services, totaled
0.52% of the average monthly net assets of such class.
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. Any portion of fees remaining from either Plan after
distribution to securities dealers of up to the maximum amount permitted under
each Plan may be used by the class to 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
for distribution expenses and related expenses 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
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 each 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 of Directors, 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 of Directors.
Fund shares are quoted ex-dividend on the first business day following the
record date. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
In order to be entitled to a dividend, the 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 its shares equal to the amount of the distribution.
While a dividend or capital gain distribution received shortly after purchasing
shares represents, in effect, a return of a portion of the shareholder's
investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the same
class of shares of the Fund or the same class of another of the Franklin
Templeton Funds. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the 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 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. 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. The difference between Class I and
Class II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below.
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 0.15% 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 following 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 initial 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 VALUE WILL BE PRECLUDED FROM
PURCHASING 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.
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 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 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 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 and children under the age of 21. In addition, the aggregate investments
of a trustee or other fiduciary account (for an account under exclusive
investment authority) may be considered in determining whether a reduced sales
charge is available, even though there may be a number of beneficiaries of the
account. The value of Class II shares owned by the investor may also be included
for this purpose.
In addition, an investment in 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 subsequent payments made to 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
360 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. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. 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 360 days after the redemption. The 360 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 360 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 their own resources, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.
Description of Special
Net Asset Value Purchases
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 of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The 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 12 months (Class I shares) or 18 months (Class II
shares) of the calendar month of the original purchase date. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect.
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 12 months (Class I shares) or 18 months
(Class II shares) of the calendar month of the original purchase date, a
contingent deferred sales charge will be imposed. 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 originally 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 on which no
sales charge was paid was transferred in from a fund on which the investor paid
a sales charge. 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 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 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, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents, as
described in the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt of a repurchase
order from the dealer, the Fund will still require a signed letter of
instruction and all other documents set forth above. A shareholder's letter
should reference the Fund 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, Class I investments
of $1 million or more and any Class II investments redeemed within the
contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month following their purchase will be assessed a contingent deferred
sales charge, unless one of the exceptions described below applies. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining if a contingent deferred sales charge applies, shares not subject
to a contingent deferred sales charge are deemed to be redeemed first, in the
following order: (i) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (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 for a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of 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. 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. 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, except that the Class I and Class II shares will bear the Rule
12b-1 expenses payable under their respective plans. 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:
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
Performance
Advertisements, sales literature and communications to shareholders may contain
various measures of a class' performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect 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, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.
General Information
Reports to Shareholders
The Fund's fiscal year ends June 30. 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. 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 the holders of more than 50%
of the shares voting for the election of directors can elect 100% of the
directors if they choose to do so and, in such event, the holders of the
remaining shares voting for the election of directors will not be able to elect
any 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 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, this affects 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 Statement of Additional
Information.
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 and, to a lesser
extent, Puerto Rico. 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 or Puerto Rico 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 second-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, which was adversely affected by the recession in the early
1990s, has begun to improve. Job growth in 1993 outperformed estimates, but
remains below the rest of the country. Future growth is likely to be modest
because of corporate downsizing of major employers in the State and cutbacks in
defense spending. Income and population growth in the State remain among the
slowest in the nation, although per capita income remains high. Slow growth in
the economy has also increased the disparity in income, which could lead to
increased service demands.
In fiscal 1994 (ended March 31), the State generated its second consecutive
operating surplus, after several years of significant deficits. However, the
State's recent history of late budgets reflects conflicting political
priorities, and the fiscal 1995 budget assumes continued economic growth which
is not certain to take place. Further, the State's ability to balance future
budgets may be threatened by rapid growth in certain spending categories and by
scheduled tax cuts in future years.
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 on 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.
Currently, City projects significant budget deficits through fiscal 1998. Credit
rating agencies have praised cost-cutting steps proposed in the mayor's fiscal
1995 budget, but have criticized certain ongoing city practices, including asset
sales and debt rescheduling, because such practices may not be sustainable. In
addition, projected cost savings or revenue forecasts may not be realized.
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.
Risk Factors Affecting Puerto Rico
Puerto Rico's economy is heavily dependent on manufacturing, services (including
trade, tourism and financial services) and government. Manufacturing has
accounted for the majority of Puerto Rico's growth since the early 1970s,
especially in the areas of pharmaceuticals, machinery and metal products.
Manufacturing's share in the island's gross domestic product ("GDP") increased
from 25% in 1971 to 39% in 1993. However, manufacturing growth has stagnated
over the past several years. The pharmaceutical industry, which makes up nearly
half of the manufacturing GDP, is under pressure from cost-containment trends in
the health care industry, potential U.S. health care reform legislation and
efforts by the federal government to reduce its budget deficit. Despite economic
progress, Puerto Rico continues to suffer from high unemployment and poverty. In
the fiscal year ended June 30, 1994, Puerto Rico's unemployment rate was
approximately 16%, more than twice the corresponding rate in the U.S., and its
income levels were below even the poorest of the 50 states. However, Puerto
Rico's economic situation is considerably stronger than it was in the mid-1980s,
when the official unemployment rate averaged over 20% for several consecutive
years.
Puerto Rico is uniquely susceptible to outside influences that affect its
economic development. Largely dependent on imported oil as a primary energy
source, the island's economy is vulnerable to changes in the price and supply of
such oil. In the early 1980s, high oil prices adversely affected Puerto Rico's
economy and enhanced the effects of an economic recession; later in the decade,
lower oil prices contributed to economic growth. Similarly, Puerto Rico's
relationship with the U.S., while providing economic benefit to the island, has
left it vulnerable to changes in U.S. policy. Recently, changes were made to
Section 936 of the Internal Revenue Code. Section 936 had been a major force
behind the development of manufacturing in Puerto Rico, because it allowed
qualifying U.S. corporations to receive tax credits which offset all or a
portion of their tax liability on earnings from Puerto Rican operations. The
impact of changes to Section 936 on future investment in Puerto Rico remains
uncertain. Finally, the effect on Puerto Rico of the 1993 approval of the North
American Free Trade Agreement ("NAFTA") is uncertain, as it is in many other
states.
Although the government has experienced recent operating deficits, a small
surplus was reported for fiscal 1994 (ended June 30) and the 1995 budget is
projected to be balanced or produce a small surplus. Current government debt
levels are relatively high on a per-capita basis. Puerto Rico's constitution
requires that its annual budgets be balanced at the time of approval, and that
its debt service be limited to 15% of general fund revenues.
