FRANKLIN
NEW YORK TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 1, 1995
as amended December 11, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
The Fund's Investment Objective
and Policies (See also the Prospectus
"Investment Objective and Policies
of the Fund") 2
Officers and Directors............ 6
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund").................... 9
Plans of Distribution............. 10
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions 12
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")...... 13
The Fund's Underwriter............ 16
Additional Information
Regarding Taxation (See also the
Prospectus "Taxation of the Fund
and Its Shareholders")........... 16
General Information............... 17
Financial Statements.............. 21
Appendix.......................... 21
Franklin New York Tax-Free Income Fund, Inc. (the "Fund") is a diversified,
open-end management investment company. Its investment objective is to provide
as high a level of dividend income which is exempt from federal, New York state
and New York City income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The Fund will seek to achieve
this investment objective through investing primarily in long-term New York
state municipal and public authority debt obligations. The Fund will invest in
securities which have been rated in the four highest categories by nationally
recognized statistical rating organizations ("NRSROs") such as Moody's Investors
Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch Investors
Service, Inc. ("Fitch") or, if unrated, deemed by the Fund's investment manager
to be of comparable quality to such four highest ratings categories, at the time
of investment. Normally, except for temporary defensive purposes, at least 80%
of the Fund's assets will be invested in tax-exempt municipal securities.
A Prospectus for the Fund dated October 1, 1995, as may be amended from time to
time, provides the basic information an investor should know before investing in
the Fund, and may be obtained without charge from the Fund or from its principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address or telephone number shown above.
As explained in the Prospectus, this Fund offers two classes of shares to its
investors: Franklin New York Tax-Free Income Fund - Class I ("Class I") and
Franklin New York Tax-Free Income Fund - Class II ("Class II"). This new
multiclass structure allows investors to consider, among other features, the
impact of front-end sales charges and distribution fees ("Rule 12b-1 fees") on
their investments in this Fund.
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide investors with additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Fund's Prospectus.
The Fund's Investment Objective and Policies
As noted in the Prospectus, the investment objective of the Fund is to provide
as high a level of dividend income to shareholders which is exempt from federal,
New York state and New York City income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. (See "Investment
Objective and Policies of the Fund" in the Prospectus.)
Although the Fund seeks to invest all of its assets in a manner designed to
accomplish its objective, there may be times when market conditions limit the
availability of appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. For temporary defensive
purposes, the Fund may invest more than 20% and up to 100% of the value of its
net assets in instruments the interest on which is exempt from federal income
taxes only, and the Fund may invest more than 20% of its assets (which could be
up to 100%)in fixed-income obligations, the interest on which is subject to
federal income tax and the Fund may invest more than 20% of the value of its net
assets (which could be up to 100%) in instruments the interest on which is
exempt from federal income taxes but not that state's personal income taxes.
Ratings
The ratings of Moody's, S&P and Fitch represent their opinions with respect to
the issuers ability to pay interest and repay principal, although they do not
purport to reflect the risk of fluctuations in market value and are not absolute
standards of quality. On May 31, 1995, 100% of the Fund's invested assets were
invested in tax-exempt securities of which 21.0% had a triple-A rating by
Moody's, S&P or Fitch; 16.3% a double-A; 22.0% a single A; 34.1% a triple-B;
1.0% a double-B; and 0.9% a single-B. Securities unrated by the NRSROs
represented 4.7% of the invested assets, of which 4.6% was considered by the
Fund's investment manager to be comparable to a triple-A rating and 0.1% to a
single-A rating. An explanation of these ratings is set forth in the Appendix
hereto.
Municipal Securities
The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which the Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or fully insured
mortgages, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Many bonds provide additional
security in the form of a debt service reserve fund, from which money may be
used to make principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of state assurance
(although without obligation) to make up deficiencies in the debt service
reserve fund.
Industrial Development Revenue Bonds. These are, in most cases, revenue bonds
and are issued by or on behalf of public authorities to raise money for the
financing of various privately operated facilities for business manufacturing,
housing, sports, and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is solely dependent on
the ability of the facilities user to meet its financial obligations and the
pledge, if any, of the real and personal property so financed as security for
such payment. The Fund will purchase Industrial development revenue bonds only
to the extent that the interest paid by a particular bond is tax-exempt pursuant
to the Tax Reform Act of 1986, which limited the types of facilities that may be
financed with tax-exempt industrial development and private activity bonds and
the amounts of such bonds each state may issue.
Variable or Floating Rate Demand Notes ("VRDNs"). VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period (generally up to 30
days) prior to specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily up
to monthly, calculated to maintain the market value of the VRDN at approximately
the par value of the VRDN upon the adjustment date. The adjustments are
typically based upon the prime rate of a bank or some other appropriate interest
rate adjustment index.
When-Issued Purchases. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place after the date that the offer is
accepted. The purchase price and the yield that will be received on the
securities are fixed at the time the buyer enters into the commitment. While the
Fund will always make commitments to purchase such securities with the intention
of actually acquiring the securities, it may nevertheless sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, they would earn no income; however, it
is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time the Fund makes the
commitment to purchase a municipal bond on a when-issued basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The Fund does not believe that its net asset value or income will
be adversely affected by the purchase of municipal bonds on a when-issued basis.
The Fund will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Municipal securities may also be sold in "stripped" form. Stripped municipal
securities represent separate ownership of interest and principal payments on
municipal obligations.
Callable Bonds. In the early 1980s large numbers of municipal bonds were issued
with provisions which prevented their being called, typically for periods of 5
to 10 years. During the coming years that protection will end on many issues.
During times of generally declining interest rates, if the call-protection on
callable bonds expires, there is an increased likelihood that a number of such
bonds may, in fact, be called away by the issuers. Based on a number of factors,
including certain portfolio management strategies used by the Fund's investment
manager, the Fund believes it has reduced the risk of adverse impact on net
asset value based on calls of callable bonds. The investment manager may dispose
of such bonds in the years prior to their call date, if the investment manager
believes such bonds are at their maximum premium potential. In pricing such
bonds in the Fund's portfolio, each callable bond is marked to the market daily
based on the bond's call date. Thus, the call of some or all of the Fund's
callable bonds may have an impact on its net asset value. In light of the Fund's
pricing policies and because the Fund follows certain amortization procedures
required by the Internal Revenue Code of 1986, as amended (the "Code"), the Fund
is not expected to suffer any material adverse impact related to the value at
which the Fund has carried the bonds in connection with calls of bonds purchased
at a premium. Notwithstanding such policies, however, the re-investment of the
proceeds of any called bond may be in bonds which pay a higher or lower rate of
return than the called bonds; and as with any investment strategy, there is no
guarantee that a call may not have a more substantial impact than anticipated or
that the Fund's objectives will be achieved.
Certificates of Participation. As stated in the Prospectus, the Fund may also
invest in municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that the
lease which is the subject of the transaction typically contains a
"nonappropriation" or "abatement" clause. A nonappropriation clause provides
that, while the municipality will use its best efforts to make lease payments,
the municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of the NRSROs, or in unrated
COPs believed by the Fund's investment manager to be of comparable quality.
Criteria considered by the rating agencies and the Fund's investment manager in
assessing such risk include the issuing municipality's credit rating, the
essentiality of the leased property to the municipality and the term of the
lease compared to the useful life of the leased property. The Board of Directors
has determined that COPs held in the Fund's portfolio constitute liquid
investments based on various factors reviewed by the investment manager and
monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated; (b) the size of the municipal
securities market for the Fund, both in general and with respect to COPs; and
(c) the extent to which the type of COPs held by the Fund trade on the same
basis and with the same degree of dealer participation as other municipal bonds
of comparable credit rating or quality. There is no limit as to the amount of
assets which the Fund may invest in COPs.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow-secured bonds will often
receive a triple-A rating from S&P and Moody's.
U.S. Government Obligations which may be owned by the Fund are issued by the
U.S. Treasury and include bills, certificates of indebtedness, notes and bonds,
or are issued by agencies and instrumentalities of the U.S. government and
backed by the full faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Fund may also invest, to the extent such investments would be
consistent with the foregoing objective and policies.
Timing of Securities Transactions
The Fund may purchase or sell securities without regard to the length of time
the security has been held to take advantage of short-term differentials in bond
yields consistent with its objective of seeking interest income while conserving
capital. While short-term trading increases the portfolio turnover, the
execution costs for municipal bonds are substantially less than those for
equivalent dollar values of equity securities. The Fund's portfolio turnover
rates are shown in the "Financial Highlights" table in the Prospectus.
Diversified Fund
As a diversified fund, the Fund is subject to the following restriction. With
respect to 75% of its net assets, the Fund, except as stated below, may not
purchase a security if, as a result of the investment, more than 5% of its total
assets would be in the securities of any single issuer (with the exception of
obligations of the U.S. government). The Fund's policy, as described in the
prospectus, applies the 5% limitation to 100% of the Fund's total assets. For
this purpose, each political subdivision, agency, or instrumentality and each
multi-state agency of which a state is a member, and each public authority which
issues private activity bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of the Fund's portfolio. A
bond for which the payments of principal and interest are secured by an escrow
account of securities backed by the full faith and credit of the U.S. government
("defeased"), in general, will not be treated as an obligation of the original
municipality for purposes of determining issuer diversification.
Defeased bonds may be excluded from issuer diversification calculations only
under the following conditions. Only U.S. government securities may be deposited
into the escrow account. The deposit must be irrevocable and pledged only to the
debt service of the underlying bonds, so that the deposited securities will not
be subject to the claims of other creditors of the issuer, even in the case of
economic defeasance. The escrow agent may not be an affiliated person of the
issuer or an affiliated person of an affiliated person of the issuer within the
meaning of section 2(a)(3) of the Investment Company Act of 1940 ("1940 Act"),
and may not have a lien of any type on the deposited securities for payment of
its fees, except with respect to excess securities. An independent certified
public accountant, counsel to holders of the original bond, or other party
acceptable to a nationally recognized statistical rating agency, must verify at
the time of the initial deposit of securities and at the time any substitute
securities are deposited into the escrow account, that the securities will
satisfy all scheduled principal, interest, and any applicable premiums on the
original bonds. The Fund will invest no more than 25% of its total assets in
refunded bonds of the same municipal issuer.
Investment Restrictions and Policies
Restrictions - The Fund has adopted the following additional restrictions as
fundamental policies, which means that they may not be changed without the
approval of a majority in interest of the Fund's shares. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a portion
of an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan. Although such loans are not presently intended, this prohibition will
not preclude the Fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower; provided such security loans may not be made if, as
a result, the aggregate of such loans exceeds 10% of the value of the Fund's
total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment adviser, own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and directors together
own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, "puts," "calls," "straddles,"
"spreads" or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the Fund and, therefore, there are no option transactions available for the
Fund.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; except to the
extent the Fund invests its uninvested daily cash balances in shares of Franklin
New York Tax-Exempt Money Fund and other tax-exempt money market funds in the
Franklin Group of Funds provided i) its purchases and redemptions of such money
market fund shares may not be subject to any purchase or redemption fees, ii)
its investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and iii)
provided aggregate investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.
11. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.
With respect to the limits set forth in Restrictions (1) and (3) above, it
should be noted that the Fund has not in the past, nor does it intend in the
future, to engage in either of those investment techniques to any extent.
In order to change any of the foregoing restrictions, or any other fundamental
policies listed in the Prospectus, approval must be obtained from the Fund's
shareholders. Such approval requires the affirmative vote of the lesser of (i)
67% or more of the Fund's voting securities present at a meeting if the holders
of more than 50% of the Fund's voting securities are represented at that meeting
or (ii) more than 50% of the Fund's outstanding voting securities.
In response to state requirements:
(1) the Fund will not invest in real estate limited partnerships or in interests
(other than publicly traded equity securities) in oil, gas, or other mineral
leases, exploration or development;
(2) the Fund may not invest in warrants (valued at the lower of cost or market)
in excess of 5.0% of the value of the Fund's net assets. No more than 2.0% of
the value of the Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American Stock
Exchanges. Warrants acquired by the Fund in units or attached to securities may
be deemed to be without value.
Officers and Directors
The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"), are
indicated by an asterisk (*).
Positions and Office Principal Occupations
Name, Age and Address with the Fund During the Past Five Years
Harris J. Ashton (63) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company), and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404. and Director
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 56 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (67) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers,
Brian E. Lorenz (56) Secretary
One North Lexington Avenue
White Plains, New York 10001-1700
Attorney, member of the law firm of Bleakley Platt & Schmidt; officer of three
of the investment companies in the Franklin Group of Funds
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Harmon E. Burns (50) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
John Pinkham (66) Vice President
16 South Main Street
Norwalk, CT 06854
Vice President of Franklin Advisers, Inc. in portfolio management capacities.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and Officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of 37
of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal Accounting
San Mateo, CA 94404 Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
The preceding table indicates those officers and directors who are also
affiliated persons of Distributors and Advisers. Directors not affiliated with
the investment manager ("nonaffiliated directors") are currently paid fees of
$800.00 per month plus $800.00 per meeting attended. As indicated above, certain
of the Fund's nonaffiliated directors also serve as directors, trustees or
managing general partners of other investment companies in the Franklin Group of
Funds(R) and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated directors by the Fund and by
other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received Franklin Templeton of Funds on which
Name from Fund* Group of Funds** Each Serves***
<S> <C> <C> <C>
Harris J. Ashton...................... $19,200 $318,125 56
S. Joseph Fortunato................... $19,200 $334,265 58
Gordon S. Macklin..................... $19,200 $301,885 53
*For the fiscal year ended May 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 162
U.S.-based funds or series.
</TABLE>
Nonaffiliated directors are also reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director, trustee or managing
general partner. Legal fees and expense reimbursements of $27,791 were paid
during the fiscal year ended May 31, 1995, to the law firm of which Mr. Lorenz
is a partner, and which acts as counsel to the Fund. No officer or director
received any other compensation directly from the Fund. Certain officers or
directors who are shareholders of Franklin Resources, Inc. ("Resources") may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries. For additional information concerning
director compensation and expenses, please see the Fund's Annual Report to
Shareholders.
As of July 5, 1995, the directors and officers, as a group, owned of record and
beneficially approximately 20,256 shares, or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding common stock.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries which are involved in
investment management and shareholder services.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's extensive research
activities include, as appropriate, traveling to meet with issuers and to review
project sites. The Manager's activities are subject to the review and
supervision of the Fund's Board of Directors to whom the Manager renders
periodic reports of the Fund's investment activities. Under the terms of the
management agreement, the Manager provides office space and office furnishings,
facilities and equipment required for managing the business affairs of the Fund;
maintains all internal bookkeeping, clerical, secretarial and administrative
personnel and services; and provides certain telephone and other mechanical
services. The Manager is covered by fidelity insurance on its officers,
directors and employees for the protection of the Fund.
The Statement of Operations in the financial statements included in the Annual
Report to Shareholders dated May 31, 1995, has details of these expenses.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the
first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2 of
1% per year) on net assets of the Fund in excess of $100 million up to $250
million; 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of the
Fund in excess of $250 million up to $10 billion; 11/300 of 1% (approximately
44/100 of 1% per year) of net assets of the Fund in excess of $10 billion up to
$12.5 billion; 7/200 of 1% (approximately 42/100 of 1% per year) of net assets
of the Fund in excess of $12.5 billion up to $15 billion; 1/30 of 1%
(approximately 40/100 of 1% per year) of net assets of the Fund in excess of $15
billion up to $17.5 billion; 19/600 of 1% (approximately 38/100 of 1% per year)
of net assets of the Fund in excess of $ 17.5 billion up to $20 billion; and
3/100 of 1% (approximately 36/100 of 1% per year) of net assets of the Fund in
excess of $20 billion.
Management fees for the fiscal years ended May 31, 1993, 1994 and 1995 were
$18,100,051, $21,149,935, and $20,769,558 respectively.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 1.5% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state limitation requirements.
The management agreement is in effect until July 31, 1996. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's
directors who are not parties to the management agreement or interested persons
of any such party (other than as directors of the Fund), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Fund or by the Manager on 30 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund or account.
The Manager may give advice and take action with respect to any of the other
funds and accounts which it manages, or for its own account, which may differ
from action taken by the Manager on behalf of the Fund. Similarly, the Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling, with respect to the Fund, any security
which the Manager and "access persons" as defined in SEC Rule 17(j) under the
1940 Act, may purchase or sell for its or their own account(s) or for the
accounts of any other fund or account; or from investing in securities held by
the Fund or other funds or accounts which it manages or administers. Of course,
any transactions for the accounts of the Manager and other "access persons" will
be made in compliance with the Fund's Code of Ethics.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
rate fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended May 31, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated May 31, 1995.
Plans of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I Plan" and
"Class II Plan," respectively, or "Plan(s)") pursuant to Rule 12b-1 under the
1940 Act.
The Class I Plan
Pursuant to the Class I Plan, the Fund may pay up to a maximum of 0.10% per
annum of its average daily net assets, payable quarterly, for expenses incurred
in the promotion and distribution of Class I shares. In implementing the Class I
Plan, the Board of Directors determined that the annual fees payable thereunder
will be equal to the sum of: (i) the amount obtained by multiplying 0.10% by the
average daily net assets represented by Class I shares of the Fund that were
acquired by investors on or after May 1, 1994, and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by Class I shares
of the Fund that were acquired before May 1, 1994. Such fees will be paid to the
current securities dealer of record on the shareholder's account. In addition,
until such time as the maximum payment of 0.10% is reached on a yearly basis, up
to an additional 0.01% will be paid to Distributors under the Plan. The payments
to be made to Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance with the Plan, such as
advertising.
The fee is a Class I expense, so that all Class I shareholders, regardless of
when they purchased their shares will bear Rule 12b-1 expenses at the same rate.
That rate initially will be at least 0.06% (0.05% plus 0.01%) of Class I's
average daily net assets and, as Class I shares are sold on or after May 1,
1994, will increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994 increases in relation to outstanding Class I
shares, the expenses attributable to payments under the Plan will also increase
(but will not exceed 0.10% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class I Plan, the
Class I Plan permits the Fund's directors to allow the Fund to pay a full 0.10%
on all assets at any time. The approval of the Fund's Board of Directors would
be required to change the calculation of the payments to be made under the Class
I Plan.
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of Class I shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Class I shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
The Class II Plan
Under the Class II Plan, the Fund pays to Distributors annual distribution fees,
payable quarterly, of up to 0.50% of Class II's average daily net assets. Such
fees may be used in order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of the Class. All
expenses of distribution and marketing over that amount will be borne by
Distributors, or others who have incurred them, without reimbursement by the
Fund. In addition to this amount, under the Class II Plan, the Fund shall pay up
to 0.15% per annum, payable quarterly, of Class II's average daily net assets as
a servicing fee. This fee will be used to pay dealers or others for, among other
things, assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
In General
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of each class of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not be
entitled to participate in the Plans to the extent that applicable federal law
prohibits certain banks from engaging in the distribution of mutual fund shares.
Such banking institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through July 31, 1996, and are renewable annually by a
vote of the Fund's Board of Directors, including a majority vote of the
directors who are non-interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plans, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such directors be done by the non-interested directors. The Plans
and any related agreement may be terminated at any time, without any penalty, by
vote of a majority of the non-interested directors on not more than 60 days'
written notice, by Distributors on not more than 60 days' written notice, by any
act that constitutes an assignment of the management agreement with the Manager,
by vote of a majority of the Fund's outstanding shares or, with respect to the
Class I Plan, by any act that constitutes an assignment of the underwriting
agreement. Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of such class of the Fund's outstanding shares, and all
material amendments to the Plans or any related agreements shall be approved by
a vote of the non-interested directors, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board of Directors at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Directors with such other
information as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plan should be
continued.
For the fiscal year ended May 31, 1995 the total amounts paid by the fund
pursuant to the Plans for Class I and Class II shares were $2,799,576 and $303,
respectively, which were used for the following purposes:
Dollar
Amount
--------
Payments to Dealers........ $2,347,359
Advertising................ $ 199,773
Printing and mailing of
prospectuses to other than
current shareholders...... $ 128,095
Payments to underwriters... $ 124,652
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Fund are principal transactions that involve
the receipt by the broker of a spread between the bid and ask prices for the
securities and not commissions, the Fund incurs little or no brokerage costs.
The Fund deals directly with the selling or purchasing principal or market maker
without incurring charges for the services of a broker on its behalf unless it
is determined that a better price or execution may be obtained by utilizing the
services of a broker. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid and ask price. As a
general rule, the Fund does not purchase bonds in underwritings where it is not
given any choice, or only limited choice, in the designation of dealers to
receive the commission. The Fund seeks to obtain prompt execution of orders at
the most favorable net price. Transactions may be directed to dealers in return
for research and statistical information, as well as for special services
rendered by such dealers in the execution of orders. It is not possible to place
a dollar value on the special executions or on the research services received by
Advisers from dealers effecting transactions in portfolio securities. The
allocation of transactions in order to obtain additional research services
permits Advisers to supplement its own research and analysis activities and to
receive the views and information of individuals and research staff of other
securities firms. As long as it is lawful and appropriate to do so, the Manager
and its affiliates may use this research data in their investment advisory
capacities with other clients. Provided that the Fund's officers are satisfied
that the best execution is obtained, the sale of Fund shares may also be
considered as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended May 31, 1995, the Fund paid no
brokerage commissions.
As of May 31, 1995, The Fund did not own any securities of its regular
broker-dealers.
Additional Information Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the Fund into which the Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
for shares of any of the investment companies will be effected at the close of
business on the day the request for exchange is received in proper form at the
net asset value then effective.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, Class I shares of the Fund
will be offered with the following schedule of sales charges:
Sales
Size of Purchase in U.S. Dollars Charge
- ------------------------------------------------------
Up to $100,000.................. 3%
$100,000 to $1,000,000.......... 2%
Over $1,000,000................. 1%
Purchases and Redemptions Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, either directly
or through affiliates, have an agreement with Distributors to handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value
Purchases - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the Fund Description
of Special Net asset Value Purchases," certain categories of investors may
purchase Class I shares of the Fund without a front-end sales charge ("net asset
value") or a contingent deferred sales charge. Either Distributors or its
affiliates may make a payment, out of its own resources, to securities dealer
who initiate and are responsible for such purchases, as indicated below.
Distributors may make these payments in the form of contingent advance payments,
which may be recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor redemptions made
within 12 months of the calendar month of purchase. Other conditions may apply.
All terms and conditions may be imposed by an agreement between Distributors, or
its affiliates, and the securities dealer.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks, either Distributors or one of its affiliates, out of
its own resources, may pay up to 1% of the amount invested.
Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the Prospectus. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the Letter
of Intent ("Letter") section completed, may be filed with the Fund. After the
Letter is filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter. Sales charge
reductions based upon purchases in more than one of the Franklin Templeton Funds
will be effective only after notification to Distributors that the investment
qualifies for a discount. The shareholder's holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions made by the shareholder during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter have been completed. If the Letter is not completed
within the 13-month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less redemptions) during
the period. An investor who executes a Letter prior to a change in the sales
charge structure for the Fund will be entitled to complete the Letter at the
lower of (i) the new sales charge structure; or (ii) the sales charge structure
in effect at the time the Letter was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name. If the total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in the name of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the amount specified
under the Letter and equal an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and the
securities dealer through whom purchases were made pursuant to the Letter (to
reflect such further quantity discount) on purchases made within 90 days before
and on those made after filing the Letter. The resulting difference in offering
price will be applied to the purchase of additional shares at the offering price
applicable to a single purchase or the dollar amount of the total purchases. If
the total purchases, less redemptions, are less than the amount specified under
the Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to the
investor.
General
Redemptions will be made in cash at the net asset value per share next
determined after receipt by the Fund of a redemption request in proper form,
including all share certificates, share assignments, signature guarantees and
other documentation as may be required by the transfer agent. The amount
received upon redemption may be more or less than the shareholder's original
investment.
The Fund will make payment for all redemptions within seven days after receipt
of such redemption request in proper form. However, the Fund reserves the right
to suspend redemptions or postpone the date of payment (1) for any periods
during which the Exchange is closed (other than for the customary weekend and
holiday closings), (2) when trading in the markets that the Fund usually
utilizes is restricted or an emergency exists, as determined by the Securities
and Exchange Commission ("SEC"), so that disposal of such Fund's investments or
the determination of such Fund's net asset value is not reasonably practicable,
or (3) for such other periods as the SEC may permit by order for the protection
of investors. Also, the Fund will not mail redemption proceeds until checks
received for the shares purchased have cleared.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the directors reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund does not intend to
redeem illiquid securities in kind; however, should it happen, shareholders may
not be able to timely recover their investment and may also incur brokerage
costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net asset value of
each class as of the scheduled close of the Exchange (generally 1:00 p.m.
Pacific time) each day that the Exchange is open for trading. As of the date of
this SAI, the Fund is informed that the Exchange observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times prior to the close of the
Exchange. The values of such securities used in computing the net asset value of
each class are determined as of such times. Occasionally, events affecting the
values of such securities may occur between the time at which they are
determined and the scheduled closing of the Exchange which will not be reflected
in the computation of net asset value of the each class. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by the
Board of Directors.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month, and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semi annual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund. The
cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions, which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping, operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until July 31, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the Fund's Board of Directors, or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Fund's directors who are not parties to
the underwriting agreement or interested persons of any such party (other than
as directors of the Fund), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event of its
assignment and may be terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
offering price (which includes the sales charge) and Distributors allowed 50% of
the entire commission to the securities dealer of record, if any, on an account.
Starting with any income dividends paid after April 30, 1994, such reinvestment
is at net asset value.
In connection with the offering of the shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1993, 1994 and 1995 were
$26,371,833, $24,747,692, and $13,734,072 respectively. After payments to
dealers, Distributors retained $1,840,740, $1,876,562, and $794,358 for the
respective periods. Distributors may be entitled to reimbursement under the
distribution plan relating to Class I shares as discussed in "Plans of
Distribution". Except as noted, Distributors received no other compensation from
the Fund with respect to the Class I shares for acting as underwriter.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Directors reserve the
right not to maintain the qualification of the Fund as a regulated investment
company if they determine such course of action to be beneficial to the
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
its tax-exempt interest dividends) to shareholders will be taxable to the extent
of the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but does not guarantee that its distributions
will be sufficient to avoid any or all federal excise taxes.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Group of Funds (defined under "How To
Buy Shares of the Fund")and a sales charge which would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge excluded
from the tax basis of the shares sold will be added to the tax basis of the
shares acquired in the reinvestment. Shareholders should consult with their tax
advisors concerning the tax rules applicable to the redemption or exchange of
fund shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
May 31, 1995 qualified for this deduction and it is not anticipated that any of
the current year's dividends will so qualify.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. While it is not the primary investment objective of this
Fund to invest in such obligations, the Fund is authorized to so invest for
temporary or defensive purposes. To the extent that such investments are made,
the Fund will provide shareholders with the percentage of any dividends paid
which may qualify for such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with respect to the
application of their state and local laws to these distributions and on the
application of other state and local laws on distributions and redemption
proceeds received from the Fund.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of the Fund.
General Information
Performance
As noted in the Prospectus, each class may from time to time quote various
performance figures to illustrate its past performance. Each class also may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
class be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations used by a class are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the classes to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period, and the deduction
of all applicable charges and fees. If a change is made in the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge currently in effect.
In considering the quotations of total return by the Fund, investors should
remember that the maximum front-end sales charge reflected in each quotation is
a one-time fee (charged on all direct purchases) which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund. The average annual
compounded rates of return for the Class I shares of the Fund for the one-year,
five-year and ten-year periods ended on May 31, 1995 were 2.55%, 7.82% and
8.71%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-,
five-, or ten-year periods
As discussed in the Prospectus, each class may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Class I shares of
the Fund for the one-, five-, and ten-year periods ended on May 31, 1995 were
2.55%, 43.68% and 130.55%, respectively. The total rate of return for the Class
II shares of the fund since inception (May 1, 1995) is 0.51%.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield for each class is determined by dividing the net investment income
per share earned by the class during a 30-day base period by the maximum
offering price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of a class during the base period. The yield for Class I shares for
the 30-day period ended on the date of the audited financial statements included
herein was 5.15%. The yield for Class II shares for the 30-day period ended on
May 31, 1995 was 4.93%.
This figure was obtained using the following SEC formula:
Yield = 2 [( a-b + 1 )6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Tax Equivalent Yield
The Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. Such yield is computed by dividing that
portion of the yield of the Fund (computed as indicated above) which is
tax-exempt by one minus the highest applicable combined federal, state and New
York City income tax rate (and adding the product to that portion of the yield
of the Fund that is not tax-exempt, if any). The tax equivalent yield for the
Class I shares of the Fund for the 30-day period ended on the date of the
financial statements included herein was 9.70%. The tax equivalent yield for the
Class II shares of the Fund for the 30-day period ended on the date of the
financial statements included herein was 9.28%. The advertised tax-equivalent
yield will reflect the most current federal, New York state and New York City
tax rates available to the Fund.
As of the date of this SAI, the state, the combined state and federal, and the
combined effective New York City, state and federal income tax rates upon which
the Fund's tax equivalent yield quotations are based are 7.6%, 44.2% and 46.9%,
respectively. From time to time, as any changes to such rates become effective,
tax equivalent yield quotations advertised by the Fund will be updated to
reflect such changes. The Fund expects updates may be necessary as tax rates are
changed by federal, state and local governments. The advantage of tax-free
investments, such as the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
Quotations of taxable equivalent yield by the Fund in advertisements may reflect
assumed rates of return which are not intended to represent historical or
current distribution rates or yields. Such quotations will be used in sales
literature, such as Franklin's Tax-Free Yield Calculator, to illustrate the
general principle of the impact taxes have on rates of return or to show the
taxable rate of return that would be needed to match a tax-free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC are not indicative of the amounts which were or
will be paid a class' shareholders. Amounts paid to shareholders are reflected
in the quoted current distribution rate or taxable equivalent distribution rate.
The current distribution rate is computed by dividing the total amount of
dividends per share paid by a class during the past 12 months by a current
maximum offering price. A taxable equivalent distribution rate demonstrates the
taxable distribution rate equivalent to the class' current distribution rate
(calculated as indicated above). The advertised taxable equivalent distribution
rate will reflect the most current federal, New York state and New York City tax
rates available to the Fund. Under certain circumstances, such as when there has
been a change in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
over the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as short-term capital
gains, and is calculated over a different period of time.
The current distribution rate and the current tax-equivalent distribution rate
for Class I shares for the 12-month period ended on May 31,1995 was 6.16% and
11.60%, respectively. And for Class II shares 5.77% and 10.87% respectively.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to the total market as represented by an index considered
representative of the municipal bond market. One measure of volatility or risk
is standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
Class I shares at net asset value, sales literature pertaining to such class may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering price.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds and classes belonging
to the Templeton Group of Funds. Franklin Resources, Inc. is the parent company
of the advisors and underwriter of both the Franklin Group of Funds and
Templeton Group of Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund and class performance as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices, and
averages. Such comparisons may include, but are not limited to, the following
examples:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Smith Barney, Shearson Donoghue's Money Fund Report Industry averages for
7-day annualized and compounded yields of taxable, tax-free and government money
funds.
d) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices LBMBI
measures yield, price and total return for the municipal bond market.
e) Bond Buyer's 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
g) Bond Buyer's Municipal Bond Index - an index based on the yields of 40
long-term, tax-exempt municipal bonds. Designed to be the basis for the
Municipal Bond Index futures contract.
h) Bond Buyer's 40 Average Dollar Price - a simple average of the current
average dollar bid prices of the 40 bonds in the Bond Buyer's Municipal Bond
Index.
i) Mutual Fund Sourcebook, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
j) Financial publications: The Wall Street Journal and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
k) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, Long-Term Utility High-Yield Index.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
m) Lipper - Mutual Fund Performance Analysis; Lipper - Fixed Income Fund
Performance Analysis; and Lipper Mutual Fund Yield Report - measure total return
and average current yield for the mutual fund industry and rank individual
mutual fund performance over specified time periods, assuming reinvestment of
all distributions, exclusive of any applicable sales charges.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication. Advertisements or information may also compare the
Fund's or class' performance to the return on certificates of deposit or other
investments. Investors should be aware, however, that an investment in the Fund
involves the risk of fluctuation of principal value, a risk generally not
present in an investment in a certificate of deposit issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares which are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. Certificates of deposit are frequently insured by an
agency of the U.S. government. An investment in the Fund is not insured by any
federal, state or private entity.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition there can be no assurance that the Fund will continue this
performance as compared to such other averages.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 47 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $130
billion in assets under management for more than 3.9 million U.S.-based mutual
fund shareholders and other accounts and offers to the public 114 U.S.-based
mutual funds. The Fund may identify itself by its NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$40 billion in municipal bond assets for over half a million investors.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1994, taxes could cost as much as
$47 on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 1994.)
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide an investor
with the potential to earn income free of federal taxes and, depending on the
fund, state and local taxes as well, while supporting state and local public
projects. Franklin tax-free funds may also provide tax-free compounding, when
dividends are reinvested. An investment in Franklin's tax-free funds can grow
more rapidly than similar taxable investments.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked 2 out of 1,000 investment advisory
firms surveyed by TMS Holdings, Inc. As of November 14, 1994, this ranking was
unchanged. Also according to the May 31, 1995, report published by Lipper
Analytical Services, Inc., the Fund is still the largest New York municipal bond
fund in existence.
From time to time, advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
At Franklin, our objective is to offer tax-free funds through a professionally
managed portfolio of tax-free securities selected for attractiveness based on
their yield, quality and maturity. No matter where you live, you'll have the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds can be a way to participate in a portfolio of municipal
securities with the added advantage of tax-free compounding, when you reinvest
your dividends. As time passes, your investment can grow more rapidly than
similar taxable investments.
Access persons of the Franklin Templeton Group, who are employees of Resources
or its subsidiaries, are permitted to engage in personal securities transactions
subject to the following general restrictions and procedures: (1) The trade must
receive advance clearance from a Compliance Officer and must be completed within
24 hours after this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
Compliance Officer; (3) In addition to items (1) and (2), access persons
involved in preparing and making investment decisions must file annual reports
of their securities holdings each January and also inform the Compliance Officer
(or other designated personnel) if they own a security that is being considered
for a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the IRS in response to a Notice of Levy.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated May 31, 1995, including the auditors' report, are incorporated
herein by reference.
Appendix
Description of Municipal Bond Ratings:
Moody's
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates and, hence, provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: Considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong although
not quite as strong as bonds rated AAA and not significantly vulnerable to
foreseeable future developments.
A bonds: Considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefor impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB bonds: Considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B bonds: Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
CCC bonds: Have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.
C bonds: Imminent default in payment of interest or principal.
DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
Rates bonds of issuers which have $600,000 or more of debt, except bonds of
educational institutions, projects under construction, enterprises without
established earnings records and situations where current financial data is
unavailable.
Rates all governmental bodies having $1,000,000 or more of debt outstanding,
unless adequate information is not available.
Municipal division handles requests from all types of domestic long- and
short-term tax-exempt issuers.
Description of Other Investments:
U.S. Government Obligations - are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. government are established under the authority of an act of Congress
and include, but are not limited to, the Government National Mortgage
Association, the Tennessee Valley Authority, the Bank for Cooperatives, the
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks and the Federal National Mortgage Association.
Certificates of Deposit - are certificates issued against funds deposited in a
commercial bank, are for a definite period of time, earn a specified rate of
return and are normally negotiable.
Bankers' Acceptances - are short-term credit instruments used to finance the
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
Commercial Paper - refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
Repurchase Agreements - involve purchase of obligations issued or guaranteed as
to interest and principal by the United States government or any agency or
instrumentality thereof or any federally-created corporation. At the same time
the Fund purchases the security, it resells it to the vendor (a member bank of
the Federal Reserve System) and is obligated to redeliver the security to the
vendor on an agreed-upon date in the future. The resale price is in excess of
the purchase price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn, at no market risk, a return on cash which is only
temporarily available. The Fund's risk is limited to the ability of the vendor
to pay an agreed-upon sum upon the delivery date.
