Franklin New York
Insured Tax-Free
Income Fund
Franklin New York Tax-Free Trust
PROSPECTUS May 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
================================================================================
The Franklin New York Insured Tax-Free Income Fund (the "Fund") is one of three
non-diversified series of the Franklin New York Tax-Free Trust (the "Trust"), an
open-end management investment company. The Fund offers individual investors,
corporations and other institutions a convenient way to invest in a
professionally managed portfolio of municipal securities, primarily issued by
the state of New York and its political subdivisions. The Fund's investment goal
is to provide investors with as high a level of income exempt from federal
income taxes and New York State and New York City personal income taxes as is
consistent with prudent investment management and the preservation of
shareholders' capital.
THE FUND INVESTS IN NEW YORK MUNICIPAL SECURITIES THAT ARE COVERED BY INSURANCE
POLICIES PROVIDING FOR THE SCHEDULED PAYMENT OF PRINCIPAL AND INTEREST IN THE
EVENT OF NON-PAYMENT BY THE ISSUER, IN SECURITIES BACKED BY THE FULL FAITH AND
CREDIT OF THE U.S. GOVERNMENT, IN MUNICIPAL SECURITIES SECURED BY SUCH U.S.
GOVERNMENT OBLIGATIONS, AND IN SHORT-TERM OBLIGATIONS OF ISSUERS WITH THE
HIGHEST RATINGS FROM MOODY'S INVESTORS SERVICE ("MOODY'S"), STANDARD & POOR'S
CORPORATION ("S&P") OR FITCH INVESTORS SERVICE, INC. ("FITCH"). ALL INSURED
SECURITIES NOT INSURED BY THE ISSUER WILL BE INSURED BY A QUALIFIED MUNICIPAL
BOND INSURER. AN INVESTMENT IN THE FUND IS NOT INSURED BY THE U.S. GOVERNMENT OR
THE STATE OF NEW YORK.
This prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
this prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items that you will
find useful.
An SAI concerning the Trust dated May 1, 1996, as may be amended from time to
time, provides a further discussion of certain areas in this prospectus and
other matters which may be of interest to you. It has been filed with the SEC
and is incorporated herein by reference. A copy is available without charge from
the Fund or from Distributors, at the address or telephone number shown above.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of
the U.S. government. Shares of the Fund involve investment risks, including the
possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
The Fund offers two classes of shares: Franklin New York Insured Tax-Free Income
Fund - Class I ("Class I") and Franklin New York Insured Tax-Free Income Fund
Class II ("Class II"). You can choose between Class I shares, which generally
bear a higher front-end sales charge and lower ongoing Rule 12b-1 distribution
fees ("Rule 12b-1 fees"), and Class II shares, which generally have a lower
front-end sales charge and higher ongoing Rule 12b-1 fees. You should consider
the differences between the two classes, including the impact of sales charges
and Rule 12b-1 fees, in choosing the more suitable class given your anticipated
investment amount and time horizon. See "How Do I Buy Shares? - Deciding Which
Class to Buy."
Contents Page
Expense Table 3
Financial Highlights - How Has
the Fund Performed? 5
What Is the Franklin New York
Insured Tax-Free Income Fund? 5
How Does the Fund Invest Its Assets? 6
Insurance 9
What Are the Fund's Potential Risks? 12
How You Participate in the
Results of the Fund's Activities 13
Who Manages the Fund? 14
What Distributions Might I
Receive from the Fund? 16
How Taxation Affects You and the Fund 17
How Do I Buy Shares? 19
What Programs and Privileges Are
Available to Me as a Shareholder? 25
What If My Investment Outlook
Changes? - Exchange Privilege 27
How Do I Sell Shares? 30
Telephone Transactions 33
How Are Fund Shares Valued? 34
How Do I Get More Information
About My Investment? 34
How Does the Fund Measure
Performance? 35
General Information 36
Registering Your Account 37
Important Notice Regarding
Taxpayer IRS Certifications 38
Useful Terms and Definitions 38
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of each class, before fee waivers and expense reductions, for the
fiscal year ended December 31, 1995. The Class II figures are annualized.
Class I Class II
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................ 4.25% 1.00%+
Deferred Sales Charge....................................... NONE++ 1.00%+++
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................................. 0.56%* 0.56%*
Rule 12b-1 Fees............................................. 0.08%** 0.65%**
Other Expenses:
Shareholder Servicing Costs............................... 0.02% 0.02%
Reports to Shareholders .................................. 0.02% 0.02%
Other..................................................... 0.05% 0.05%
Total Other Expenses........................................ 0.09% 0.09%
Total Fund Operating Expenses............................... 0.73%* 1.30%*
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*The Manager has agreed in advance to waive a portion of its management fee and
to make certain payments to reduce expenses of the Fund. With this reduction,
management fees represented 0.48% and total operating expenses for Class I and
Class II represented 0.65% and 1.23%, respectively, of the average net assets of
each class.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.10%. See "Who Manages the Fund? - Plans of Distribution."
Rule 12b-1 fees for Class II are based on the contractual amount. Consistent
with National Association of Securities Dealers, Inc.'s rules, it is possible
that the combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
One Year Three Years Five Years Ten Years
Class I..................... $50* $65 $81 $129
Class II.................... $33 $51 $81 $165
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would incur the following expenses on the same investment in Class II
shares, assuming no redemption.
One Year Three Years Five Years Ten Years
Class II.................... $23 $51 $81 $165
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by you
as a result of your investment in the Fund. In addition, federal securities
regulations require the example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for the period May 1, 1991 (effective
date of registration) to December 31, 1991 and each of the four fiscal years in
the period ended December 31, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Trust's Annual Report to Shareholders for the fiscal year ended December 31,
1995. See "Reports to Shareholders" under "General Information" in this
prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
------------------------------------------------------ ------------------------------
Distri- Net Net
Net Asset Net Realized butions Asset Assets Ratio of Ratio of
Period Value Net & Unrealized Total From From Net Value at End Expenses Net Income Portfolio
Ended Beginning Investment Gain (Loss) Investment Investment at End Total of Period to Average to Average Turnover
December 31 of Period Income on Securities Operations Income of Period Return+ (in 000's) Net Assets++Net Assets Rate
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991** $10.00 $.247 $(0.433 $0.680 $(.220) $10.46 6.75% $037,904 .12%* 5.69%* 21.12%
1992 10.46 .620 .369 .989 (.649) 10.80 9.49 149,054 .33 5.80 3.39
1993 10.80 .600 .880 1.480 (.600) 11.68 13.79 263,647 .50 5.28 5.38
1994 11.68 .590 (1.525) (.935) (.585) 10.16 (8.19) 225,061 .56 5.48 25.66
1995 10.16 .590 1.248 1.838 (.588) 11.41 18.46 256,171 .65 5.38 22.99
Class II Shares:
1995*** 10.85 .357 .596 .953 (.343) 11.46 8.92 696 1.23*++ 4.74*++ 22.99
</TABLE>
*Annualized.
**For the period May 1, 1991 (effective date of registration) to December 31,
1991.
***For the period May 1, 1995 (effective date) to December 31, 1995.
++Ratio has been calculated using daily average net assets during the period.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge or the contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains, if any, at net asset value. Prior to May 1, 1994,
dividends were reinvested at the maximum offering price. Effective May 1, 1994,
with the implementation of the Rule 12b-1 distribution plan for Class I shares,
the sales charge on reinvested dividends was eliminated.
++During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and to make payments of other expenses incurred by the Fund.
Had such action not been taken, the ratio of operating expenses to average net
assets would have been as follows:
Ratio of Expenses
Period Ended Dec. 31 to Average Net Assets
Class I:
1991**................. .84%*
1992................... .74
1993................... .65
1994.................. .71
1995................... .73
Class II:
1995***................1.30*++
What Is the Franklin New York Insured Tax-Free Income Fund?
The Fund is a non-diversified series of the Trust, an open-end management
investment company, commonly called a "mutual fund." The Trust was organized as
a Massachusetts business trust in July 1986 and registered with the SEC under
the 1940 Act. The Fund has two classes of shares of beneficial interest
("multiclass" structure) with no par value: Franklin New York Insured Tax-Free
Income Fund Class I and Franklin New York Insured Tax-Free Income Fund - Class
II. All Fund shares outstanding before May 1, 1995, have been redesignated as
Class I shares, and will retain their previous rights and privileges, except for
legally required modifications to shareholder voting procedures, as discussed in
"General Information - Organization and Voting Rights."
How Does the Fund Invest Its Assets?
The Fund seeks to provide investors with as high a level of income exempt from
federal income taxes and New York State and New York City personal income taxes
as is consistent with prudent investment management and the preservation of
shareholders' capital. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. As with any investment, there is no
assurance that the Fund's objective will be achieved.
Types of Securities the Fund May Purchase
The Fund attempts to invest 100%, and as a matter of fundamental policy will
invest at least 80%, of its total assets in securities that pay interest exempt
from federal income taxes, including the alternative minimum tax. It is
possible, although not anticipated, that up to 20% of the Fund's total assets
could be in federally taxable obligations.
At least 65% of the Fund's total assets will be invested in municipal securities
and obligations issued by or on behalf of the state of New York and its local
governments, municipalities, authorities, agencies and political subdivisions
("New York Municipal Securities"). It is possible, although not anticipated,
that up to 35% of the Fund's total assets may be in municipal securities and
obligations of a state or local government other than New York, and these
securities may or may not pay income exempt from New York State and New York
City personal income taxes, including any alternative minimum tax.
The Fund will also invest at least 65% of its total assets in insured municipal
securities. The Fund is permitted to invest up to 35% of its total assets in
municipal securities secured by an escrow or trust account consisting of U.S.
government obligations, without obtaining insurance. At the time insurance is
obtained, the insurer evaluates a security using quality standards that are
independently determined by the insurer. Normally insured municipal securities
carry one of the top three ratings by S&P (AAA, AA and A), Moody's (Aaa, Aa and
A) or Fitch (AAA, AA or A). An insurer may also insure municipal securities that
are unrated or have lower ratings, but that meet its quality standards based on
its own internal research and analysis. (See "Insurance.")
Pending investment in longer-term municipal securities, the Fund also may invest
up to 35% of its total assets in short-term, tax-exempt instruments, without
obtaining insurance, if these instruments carry the highest rating by Moody's,
S&P or Fitch. For a description of these ratings, please see "Appendix B -
Description of Municipal Securities Ratings" in the SAI.
Under normal market conditions, the Fund will invest its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to 100%
of its total assets in obligations whose interest may be subject to federal
income tax, including the alternative minimum tax. Also for temporary defensive
purposes, the Fund may invest up to 100% of its total assets in (i) municipal
securities and obligations of state and local governments other than New York,
(ii) commercial paper rated at least A-1 by S&P, P-1 by Moody's or F-1 by Fitch
or (iii) obligations issued or guaranteed by the full faith and credit of the
U.S. government.
Municipal Securities
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession of the U.S. and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from regular federal income
tax. An opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to provide funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. Accordingly, the Fund will seek to invest in municipal securities
with maturities which, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with prudent investment.
Advisers will also consider current market conditions and the cost of the
insurance obtainable on such securities.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities. Prices of longer term securities, however, typically
fluctuate more than shorter term securities due to changes in interest rates,
tax laws and other general market factors. Lower rated municipal securities
generally produce a higher yield than higher rated municipal securities due to
the perception of a greater degree of risk as to the ability of the issuer to
pay principal and interest obligations. Although the cost of insurance to the
Fund reduces the Fund's yield, one of the objectives of such insurance is to
obtain a higher yield than would be available if all securities in the Fund's
portfolio were rated "AAA" or its equivalent without the benefit of any
insurance.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Code, and under the income tax provisions of
some states. This interest may subject you to, or increase your liability under,
the federal and state alternative minimum tax. In addition, all distributions
derived from interest exempt from regular federal income tax may subject
corporate shareholders to, or increase their liability under, the federal
alternative minimum tax, because these distributions are included in the
corporation's adjusted current earnings. In states with a corporate franchise
tax, distributions of the Fund may also be fully taxable to corporate
shareholders under their state franchise tax systems. Consistent with the Fund's
investment objective, the Fund may acquire these private activity bonds if, in
Advisers' opinion, these bonds represent the most attractive investment
opportunity then available to the Fund. As of December 31, 1995, the Fund
derived 10.73% of its income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors.
Floating and Variable Rate Obligations. The Fund may buy floating and variable
rate obligations. These obligations bear interest at rates that are not fixed,
but that vary with changes in prevailing market rates on predesignated dates.
The Fund may also invest in variable or floating rate demand notes ("VRDNs"),
which carry a demand feature that permits the Fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation, which amount may be more or
less than the amount the Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements. The Fund will
limit its purchase of municipal securities that are floating and variable rate
obligations to those meeting the quality standards set forth in this prospectus.
Certificates of Participation. The Fund may invest in municipal lease
obligations, primarily through Certificates of Participation ("COPs"). COPs,
which are widely used by state and local governments to finance the purchase of
property, function much like installment purchase agreements. A COP is created
when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities which are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the obligations issued to purchase
the property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in insured
COPs. While there is no limit as to the amount of assets that the Fund may
invest in COPs, as of December 31, 1995, less than 1% of the Fund's net assets
was invested in COPs and other municipal leases.
Callable Bonds. The Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time during which the bonds may not be called)
that usually lasts for 5 to 10 years, after which time these bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of declining interest rates, when borrowings may be
replaced at lower rates than those obtained in prior years. If the proceeds of a
bond called under such circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of such
bonds included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the Fund,
depending on the price at which such bonds were sold.
When-Issued and Delayed Delivery. The Fund may buy and sell municipal securities
on a "when-issued" and "delayed delivery" basis. The prices of these securities
are subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring such
securities, it may sell such securities before the settlement date if it is
deemed advisable. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so for the purpose of
acquiring securities for the Fund's portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage.
Other Investment Policies of the Fund
Borrowing. The Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Fund does not currently
intend to do so, consistent with procedures approved by the Board, the Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, provided that such loans do not exceed 10% of the value
of the Fund's total assets at the time of the most recent loan. See the SAI for
more information.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the net assets of the Fund.
Other. The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders, which limit
its activities to some extent. For a list of these restrictions and more
information about the policies discussed herein, please see "How Do the Funds
Invest Their Assets?" and "Investment Restrictions" in the SAI.
Insurance
Except as indicated, each insured municipal security in the Fund's portfolio
will be covered by either a "New Issue Insurance Policy," a "Portfolio Insurance
Policy" or a "Secondary Insurance Policy" issued by a qualified municipal bond
insurer.
These policies are intended to insure that the scheduled amount of principal and
interest on each municipal security is paid when due. The insurance of principal
refers to the face or par value of each security and is not affected by the
price paid by the Fund for the security or its market value. Each insured
municipal security is secured by an insurance policy from any one of several
qualified insurance companies which allows Advisers to diversify among credit
enhancements. The Fund will acquire municipal securities secured by an insurance
policy only where the claims paying ability of the insurer is rated "AAA" or the
equivalent by S&P, Moody's or Fitch.
New Issue Insurance Policy
New Issue Insurance Policies, if any, are obtained by the issuers of the
municipal securities and all premiums for these securities are paid in advance
by these issuers. Such policies are non-cancelable and will continue in force so
long as the municipal securities are outstanding and the respective insurers
remain in business. Since New Issue Insurance Policies remain in effect as long
as the securities are outstanding, the insurance may affect the resale value of
securities in the Fund's portfolio. While New Issue Insurance Policies may be
considered to represent an element of the market value of insured municipal
securities, the exact effect, if any, of this insurance cannot be estimated. As
stated earlier, the Fund will acquire securities subject to New Issue Insurance
Policies only where the claims paying ability of the insurer thereof is rated
"AAA" or the equivalent by S&P, Moody's or Fitch.
In determining whether to insure any municipal security, the insurer has applied
its own standards, which are not necessarily the same as the criteria used in
regard to the selection of securities by Advisers. A contract to buy an insured
municipal security is only entered into if there is either permanent insurance
in place or an irrevocable commitment to insure the municipal security by a
qualified insurer.
Portfolio Insurance Policy
The Portfolio Insurance Policy obtained by the Fund from a qualified municipal
bond insurer is effective only so long as the Fund is in existence, the insurer
is still in business and meeting its obligations, and the municipal securities
described in the policy continue to be held by the Fund. In the event of a sale
of any municipal security by the Fund or payment thereof before maturity, the
Portfolio Insurance Policy terminates as to that municipal security.
The Portfolio Insurance Policy obtained by the Fund may be canceled for failure
to pay the premium. Nonpayment of premiums on this policy will also permit the
insurer to take action against the Fund to recover premium payments due. The
insurer cannot cancel coverage already in force with respect to municipal
securities owned by the Fund and covered by the Portfolio Insurance Policy,
however, except for nonpayment of premiums.
Premium rates for each issue of securities covered by the Portfolio Insurance
Policy may not be changed regardless of the issuer's ability or willingness to
pay. The insurance premiums are payable monthly by the Fund and are adjusted for
purchases and sales of covered securities during the month. In the event that a
portfolio holding which has been covered by a Portfolio Insurance Policy is
pre-refunded and irrevocably secured by a U.S. government security, the
insurance is no longer required. Any security for which insurance is canceled,
other than as provided herein, will be sold by the Fund as promptly thereafter
as possible.
The premium on the Fund's Portfolio Insurance Policy is an expense item included
in the Fund's average annual expenses. The average annual premium rate for the
Portfolio Insurance Policy is determined by dividing the amount of the Fund's
annual Portfolio Insurance Policy premium by the face amount of the insured
bonds in its investment portfolio covered by that policy. Because premiums are
paid from the Fund's assets, they reduce the current yield on the portfolio.
When the Fund buys a Secondary Insurance Policy (discussed below), the single
premium is added to the cost basis of the municipal security and is not
considered an item of expense of the Fund.
Secondary Insurance Policy
The Fund may at any time buy from the provider of a Portfolio Insurance Policy a
permanent Secondary Insurance Policy on any municipal security so insured and
held by the Fund. The coverage and obligation of the Fund to pay monthly
premiums under a Portfolio Insurance Policy ceases when a Secondary Insurance
Policy is purchased on such security.
By buying a Secondary Insurance Policy and paying the premium, the Fund obtains
similar insurance against nonpayment of scheduled principal and interest for the
remaining term of the security. This insurance coverage is noncancellable and
continues in force as long as the securities so insured are outstanding. One of
the purposes of acquiring such a policy is to enable the Fund to sell the
portfolio security to a third party as an AAA-rated or equivalent insured
security at a market price higher than what otherwise might be obtainable if the
security was sold without the insurance coverage. (This rating is not automatic,
however, and must specifically be requested from Moody's, S&P or Fitch for each
bond.) Such a policy is likely to be purchased if, in the opinion of Advisers,
the market value or net proceeds of a sale by the Fund may exceed the current
value of the security (without insurance) plus the cost of the policy. Any
difference between the excess of a security's market value as a AAA-rated or
equivalent security over its market value without such rating, including the
single premium cost, inures to the Fund in determining the net capital gain or
loss realized by the Fund upon the sale of the portfolio security. The Fund may
buy insurance under a Secondary Insurance Policy in lieu of a Portfolio
Insurance Policy at any time, regardless of the effect of market value on the
underlying municipal security, if Advisers believes such insurance would best
serve the Fund's interests in meeting its objective and policies.
Since under the original agreement to obtain a temporary insurance policy the
Fund has the right to buy a permanent Secondary Insurance Policy even if the
security is currently in default as to any payments by the issuer, the Fund has
the opportunity to sell the security rather than hold it in its portfolio in
order to continue in force the applicable Portfolio Insurance Policy, as
discussed below.
Because coverage under the Portfolio Insurance Policy ends upon sale of a
security from the Fund's portfolio, this insurance does not affect the resale
value of the securities. Therefore, the Fund may retain any municipal securities
insured under a Portfolio Insurance Policy which are in default or in
significant risk of default, and place a value on the insurance which will be
equal to the difference between the market value of the defaulted securities and
the market value of similar securities which are not in default. (See "How Are
Fund Shares Valued?") While a defaulted municipal security is held in the Fund's
portfolio, the Fund continues to pay the insurance premium on it but also
collects interest payments from the insurer and retains the right to collect the
full amount of principal from the insurer when the security comes due.
Municipal Securities Backed By
Escrow or Trust Accounts
The Fund may also own, without insurance coverage, municipal securities for
which an escrow or trust account has been established pursuant to the documents
creating the municipal security. The escrow or trust account must contain
sufficient securities backed by the U.S. government's full faith and credit
pledge to secure the payment of principal and interest on such bonds.
Municipal Bond Insurer
A "qualified municipal bond insurer" refers to companies whose charter limits
their risk assumption to insurance of financial obligations only. This precludes
assumption of other types of risk, such as life, medical, fire and casualty,
auto and home insurance. The bond insurance industry is a regulated industry.
All bond insurers must be licensed in each state in order to write financial
guaranties in that jurisdiction. Regulations vary from state to state. Most
regulators, however, require minimum standards of solvency and limitations on
leverage and investment of assets. New York State, which is one of the most
active regulators, requires a minimum capital base of $72.5 million for a new
primary bond insurer. Regulators also place restrictions on the amount an
insurer can guarantee in relation to the insurer's capital base. Neither the
Fund nor Advisers makes any representations as to the ability of any insurance
company to meet its obligation to the Fund if called upon to do so.
Currently, there are no bonds in the Fund's portfolio on which an insurer is
paying the principal or interest otherwise payable by the issuer of the Fund's
portfolio obligations. The SAI contains more information on municipal bond
insurers.
What Are the Fund's Potential Risks?
Credit and Market Risk. While an investment in the Fund is not without risk,
certain policies are followed in managing the Fund that may help to reduce that
risk. There are two categories of risks that the Fund is subject to: credit risk
and market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. The Fund attempts to
minimize credit risk by maintaining the insurance coverage discussed above.
Market risk is the risk of price fluctuation of a municipal security caused by
changes in general economic and interest rate conditions generally affecting the
market as a whole. A municipal security's maturity length also affects its
price. As with other debt instruments, the price of the securities in which the
Fund invests are likely to decrease in times of rising interest rates.
Conversely, when rates fall, the value of the Fund's investments may rise. Price
changes of securities held by the Fund have a direct impact on the net asset
value per share of the Fund. The insurance does not guarantee the market value
of the municipal securities and, except as indicated in this prospectus, has no
effect on the net asset value, redemption price, or dividends paid by the Fund.
Non-diversification. As a non-diversified series of the Trust, the Fund is not
subject to any statutory restriction under the 1940 Act with respect to the
concentration of its investments in the assets of one or more issuers. This
concentration may present greater risks than in the case of a diversified series
of an investment company. (See the SAI for the diversification requirements the
Fund intends to meet in order to qualify as a regulated investment company under
the Code.)
Risk Factors in New York
Since the Fund primarily invests in New York Municipal Securities, there are
certain specific factors and considerations concerning New York State and New
York City that may affect the credit and market risk of the municipal securities
to be purchased by the Fund. The following information is based primarily upon
information derived from public documents relating to securities offerings of
issuers of New York Municipal Securities, from independent municipal credit
reports and historically reliable sources, but has not been independently
verified by the Fund.
The primary purpose of investing in a portfolio of New York Municipal Securities
is the special tax treatment accorded New York resident individual investors.
Payment of interest and preservation of principal, however, is dependent upon
the continuing ability of New York issuers and/or obligors of state, municipal
and public authority debt obligations to meet their obligations thereunder. You
should be aware that certain substantial issuers of New York Municipal
Securities (including issuers whose obligations may be acquired by the Fund)
have experienced financial difficulties in recent years. These difficulties have
at times jeopardized the credit standing and impaired the borrowing abilities of
other New York issuers and have generally contributed to higher interest rates
and lower market prices for their debt obligations. A recurrence of the
financial difficulties previously experienced by such issuers could result in
defaults or declines in the market values of their existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Securities.
As of the date of filing of this prospectus with the SEC, no issuers of New York
Municipal Securities were, to the knowledge of Advisers, in default with respect
to the payment of their debt obligations. The occurrence of any such default
could adversely affect the market values and marketability of all New York
Municipal Securities and, consequently, the net asset value of the Fund's
portfolio. Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Securities are summarized in the SAI.
You should consider the greater risk of the Fund's concentration in New York
Municipal Securities versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on portfolios of New
York issues with those of more diversified portfolios, including out-of-state
issues, before making an investment decision. Advisers believes, however, that
by maintaining the Fund's investment portfolio in New York Municipal Securities
which are covered by insurance policies providing for the scheduled payment of
principal and interest in the event of non-payment by the issuer, the Fund is
largely insulated from the credit risks that may exist on long-term New York
Municipal Securities. The SAI contains a further description of risks under
"Appendix A Risk Factors Affecting New York Municipal Securities."
How You Participate in the
Results of the Fund's Activities
If the securities owned by the Fund increase in value, the value of the shares
of the Fund which you own will increase. If the securities owned by the Fund
decrease in value, the value of your shares will also decline. In this way, you
participate in any change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader bond markets. In particular,
changes in interest rates will affect the value of the Fund's portfolio and thus
its share price. Increased rates of interest, which frequently accompany higher
inflation and/or a growing economy are likely to have a negative effect on the
value of Fund shares. History reflects both increases and decreases in the
prevailing rate of interest and these may reoccur unpredictably in the future.
Who Manages the Fund?
The Board has the primary responsibility for the overall management of the Trust
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (119 separate series) with aggregate
assets of over $81 billion, $42 billion of which is in the municipal securities
market.
The team responsible for the day-to-day management of the Fund's portfolio:
Donald Duerson and Andrew Jennings, Sr. since inception and Thomas Kenny since
1994.
Donald Duerson
Vice President of Advisers
Mr. Duerson has a Bachelor of Science degree in Business and Public
Administration from the University of Arizona, and has experience in the
securities industry dating back to 1956. He is a member of industry-related
committees and associations. He joined Advisers in 1986.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings attended Villanova University in Philadelphia and has been in the
securities industry for over 33 years. From 1985 to 1990, Mr. Jennings was First
Vice President and Manager of the Municipal Institutional Bond Department at
Dean Witter Reynolds, Inc. He is a member of several municipal securities
industry-related committees and associations.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is the director of Franklin's municipal bond department. He joined
Franklin in 1986. He received a Bachelor of Arts degree in Business and
Economics from the University of California at Santa Barbara and Master of
Science degree in Finance from Golden Gate University. He is a member of several
municipal securities industry-related committees and associations.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities that are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Trust are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Trust's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Trust's
Code of Ethics.
During the fiscal year ended December 31, 1995, management fees, before any
advance waiver, totaled 0.56% of the average net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
0.73% and 1.30% of the average net assets of Class I and Class II, respectively.
Pursuant to an agreement by Advisers to limit its fees, the Fund paid management
fees totaling 0.48% of the average net assets of the Fund and operating expenses
totaling 0.65% and 1.23% for Class I and Class II, respectively. This
arrangement may be terminated by the Manager at any time upon notice to the
Board.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions that involve the receipt by the broker of a spread between the bid
and ask prices for the securities and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
such transactions will be effected. The Manager would try to obtain the best
execution on all such transactions. If it is felt that more than one broker
would be able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
the Fund, as factors in selecting a broker. Further information is included
under "How Do the Funds Purchase Securities For Their Portfolios?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse Distributors or others under the
Class I Plan for distribution expenses is 0.10% per annum of Class I's average
daily net assets, payable on a quarterly basis. All expenses of distribution in
excess of 0.10% per annum will be borne by Distributors, or others who have
incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to .50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Trust's Underwriter" in the
SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of such year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund may make one
distribution derived from net short-term and net long-term capital gains in any
year or adjust the timing of its distributions for operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends daily and
pay them monthly on or about the last business day of that month. Daily
allocation of net investment income will begin on the day after the Fund
receives your money or settlement of a wire order trade and will continue to
accrue through the day of receipt of your redemption request or the settlement
of a wire order trade.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. The Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
Payment of dividends by the Fund is not insured.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the same class of
the Fund. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the reinvestment date for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to you. These
exempt-interest dividends are derived from interest income exempt from regular
federal income tax and are not subject to regular federal income tax for you. In
addition, to the extent that exempt-interest dividends are derived from interest
on obligations of New York and its political subdivisions, from interest on
direct obligations of the federal government, or from interest on U.S.
territorial obligations (including Puerto Rico, the U.S. Virgin Islands or
Guam), they will be exempt from New York State and New York City personal income
taxes. For corporate taxpayers subject to the New York State franchise tax,
however, the foregoing categories of interest income will generally be taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, or from the excess of net short-term
capital gain over net long-term capital loss, they are treated as ordinary
income whether you have elected to receive them in cash or in additional shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount, and such market discount
exceeds a de minimis amount. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to you will be subject to regular income tax in your hands. In any fiscal year,
the Fund may elect not to distribute to you its taxable ordinary income and,
instead, to pay federal income or excise taxes on this income at the Fund level.
The amount of such distributions, if any, is expected to be small.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
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
December 31, 1995, qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that constitutes taxable income or interest income that is a tax preference item
under the alternative minimum tax. If you have not held shares of the Fund for a
full calendar year, you may have designated as tax-exempt or as tax preference
income a percentage of income which is not equal to the actual amount of
tax-exempt or tax preference income earned during the period of your investment
in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includible in the tax base for determining the
extent to which a shareholder's social security or railroad retirement benefits
will be subject to federal income tax. You are required to disclose the receipt
of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry Fund shares will not be deductible for federal income tax purposes.
The foregoing description relates solely to federal income tax law and to New
York State and New York City personal income tax treatment to the extent
indicated. You should consult your tax advisor with respect to the applicability
of other state and local income tax laws to distributions and redemption
proceeds received from the Fund. Corporate, individual and trust shareholders
should contact their tax advisors to determine the impact of Fund dividends and
capital gain distributions under the alternative minimum tax that may be
applicable to you.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. To open your account,
contact your investment representative or complete and sign the enclosed
Shareholder Application and return it to the Fund with your check. Please
indicate which class of shares you want to buy. If you fail to specify a class,
your purchase will automatically be invested in Class I shares.
Deciding Which Class to Buy
When deciding which class of shares to buy, you should consider a number of
factors, including the amount you expect to invest and the length of time you
expect to hold your investment. If you plan to invest $1 million or more in a
single payment or you qualify to buy Class I shares at net asset value, you may
not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you intend to purchase $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in Franklin Templeton Funds; and
o you intend to make substantial redemptions within approximately six years or
less of investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees, which accumulate over time to outweigh the
lower Class II front-end sales charge and result in lower income dividends for
Class II shareholders. If you qualify to buy Class I shares at a reduced sales
charge based upon the size of your purchase or through our Letter of Intent or
Rights of Accumulation programs, but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical for
you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a contingent deferred sales charge. Any purchase of
$1 million or more will therefore be automatically invested in Class I shares.
You may accumulate more than $1 million in Class II shares through purchases
over time, but if you intend to do this you should determine whether it would be
more beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
You may buy shares at the public offering price of the class you wish to
purchase, unless you qualify to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is 1%
and, unlike Class I shares, does not vary based upon the size of your purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
CLASSI
<S> <C> <C> <C>
Under $100,000............................. 4.25% 4.44% 4.00%
$100,000 but less than $250,000............ 3.50% 3.63% 3.25%
$250,000 but less than $500,000............ 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000.......... 2.15% 2.20% 2.00%
$1,000,000 or more......................... None** None None***
CLASSII
Under $100,000+............................ 1.00%** 1.01% 1.00%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places using
standard rounding criteria.
Quantity Discounts in Sales Charges -
Class I Shares Only
As shown in the table above, the sales charge you pay when you buy Class I
shares may be reduced based upon the size of your purchase.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current Class I purchase. To receive the reduction, you or
your investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase Class I shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you pay
on Class I shares. You or your investment representative must inform us that the
Letter is in effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Class I shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase
Class I shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase. For example, if
group members previously invested and still hold $80,000 of Fund shares and
invest $25,000, the sales charge will be 3.50%.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in Class I shares of the Fund
without paying front-end or contingent deferred sales charges. You may also
purchase Class II shares without paying front-end or contingent deferred sales
charges if the source of your investment proceeds is included in paragraph (i)
below:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive from the Fund?" or call Shareholder Services at
1-800/632-2301; or
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days.
(iii) an annuity payment received under either an annuity option or from death
benefit proceeds, provided that the annuity contract offers as one underlying
investment option the Franklin Valuemark Funds, Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You must return the payment within 365 days of its payment
date. You should contact your tax advisor for information on any tax
consequences of these purchases.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds in Class I or Class II shares of the Fund at net asset value. To
do so, you must (a) have paid a sales charge on the purchase or sale of the
original shares, (b) reinvest the redemption money in the same class of shares,
and (c) request the reinvestment of the money within 365 days of the redemption
date. You may reinvest up to the total amount of the redemption proceeds under
this privilege. If a different class of shares is purchased, the full front-end
sales charge must be paid at the time of purchase of the new shares. While you
will receive credit for any contingent deferred sales charge paid on the shares
redeemed, a new contingency period will begin. Shares that were no longer
subject to a contingent deferred sales charge will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
exchanged into other Franklin Templeton Funds are not considered "redeemed" for
this privilege (see "What If My Investment Outlook Changes? - Exchange
Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Fund at net asset value regardless of the source of the investment proceeds. If
you or your account is included in one of the categories below, none of the
Class I shares you purchase will be subject to front-end or contingent deferred
sales charges:
(i) registered securities dealers and their affiliates, for their investment
accounts only;
(ii) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(iii) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in comprehensive
fee programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or by
another registered investment advisor affiliated with that broker;
(iv) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or the Manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(v) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(vi) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(vii) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(viii) accounts managed by the Franklin Templeton Group; or
(ix) certain unit investment trusts and unit holders of these trusts reinvesting
distributions from the trusts in the Fund.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this written
statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
General
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I purchases of $1 million or more: 0.75% on sales of
$1 million but less than $2 million, plus 0.60% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in paragraph
(vi) under "Purchases at Net Asset Value" above. Please see "How Do I Buy and
Sell Shares?" in the SAI for the breakpoints applicable to these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price. To
partially recoup these payments, Distributors will keep part of the Rule 12b-1
fees assessed to the shares during the first year following their purchase.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers and
Trustees."
What Programs and Privileges Are
Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of buying, selling or exchanging shares of the
Fund available to institutional accounts. For further information, contact the
Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums. Some funds, however, may not offer Class
II shares. Class I shares may be exchanged for Class I shares of any of the
other Franklin Templeton Funds. Class II shares may be exchanged for Class II
shares of any of the other Franklin Templeton Funds. No exchanges between
different classes of shares will be allowed. A contingent deferred sales charge
will not be imposed on exchanges. If, however, the exchanged shares were subject
to a contingent deferred sales charge in the original fund purchased and shares
are subsequently redeemed within the contingency period, a contingent deferred
sales charge will be imposed. Before making an exchange, you should review the
prospectus of the fund you wish to exchange from and the fund you wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer- ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into a fund which has a
higher sales charge will be charged the difference, unless the shares were held
in the Fund for at least six months prior to executing the exchange.
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund in accordance with the
procedures set forth above. Because the exchange is considered a redemption and
purchase of shares, you may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this prospectus and under "Additional Information
Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term, tax-exempt municipal
securities and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and you exchange $3,000 into a new fund, $500 will be exchanged from
free shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out, or free-shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
Market Timers
The Fund currently will not accept investments from Market Timers.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non- monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
By Mail
Send a written request signed by all registered owners, to Investor Services, at
the address shown on the back cover of this prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) each day that the Exchange is open for
trading. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
that are members of a national securities exchange or a clearing agency or that
have minimum net capital of $100,000; or (4) institutions that participate in
the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
When shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this prospectus, you may redeem
shares of the Fund by telephone. You may obtain additional information about
telephone redemptions by writing to the Fund or Investor Services at the address
shown on the cover or by calling 1-800/632-2301. The Fund and Investor Services
will employ reasonable procedures to confirm that instructions given by
telephone are genuine. You, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this prospectus. Institutional accounts
(certain corporations, bank trust departments and government entities that
qualify to purchase shares at net asset value pursuant to the terms of this
prospectus) that wish to execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. Your dealer may charge a fee for handling the order.
See "How Do I Buy and Sell Shares?" in the SAI for more information on the
redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: specified net asset value purchases discussed under "How Do I
Buy Shares? - Purchases at Net Asset Value"; exchanges; any account fees;
redemptions initiated by the Fund due to an account falling below the minimum
specified account size; redemptions following the death of the shareholder or
beneficial owner; and redemptions through a Systematic Withdrawal Plan set up
for shares prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually). For example, if a Class I account
maintained an annual balance of $1,000,000, only $120,000 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge. Any amount over
that $120,000 would be assessed a 1% contingent deferred sales charge. Likewise,
if a Class II account maintained an annual balance of $10,000, only $1,200 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this prospectus by telephone. In addition, if you
complete and file an Agreement as described under "How Do I Sell Shares? - By
Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are the Funds' Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this prospectus.
From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin account
and request duplicate confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 181 and 281, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu.
Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing Impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return, tax equivalent yield, taxable equivalent and current
distribution rate. They may also occasionally cite statistics to reflect the
Fund's volatility or risk.
Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Fund may also furnish total
return quotations for each class for other periods or based on investments at
various sales charge levels or at net asset value. For such purposes, total
return equals the total of all income and capital gain paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the change in the
value of the original investment, expressed as a percentage of the purchase
price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Tax equivalent yield demonstrates the yield from a taxable investment necessary
to produce an after-tax yield equivalent to that of a fund which invests in
tax-exempt obligations. It is computed by dividing the tax-exempt portion of
each class' yield (calculated as indicated) by one minus a stated income tax
rate and adding the product to the taxable portion (if any) of the class' yield.
Current yield and tax equivalent yield for each class, which are calculated
according to a formula prescribed by the SEC (see "General Information" in the
SAI), are not indicative of the dividends or distributions which were or will be
paid to the Fund's shareholders. Dividends or distributions paid to shareholders
of a class are reflected in the current distribution rate or taxable equivalent
distribution rate, which may be quoted to you. The current distribution rate is
computed by dividing the total amount of dividends per share paid by a class
during the past 12 months by a current maximum offering price for that class of
shares. A taxable equivalent distribution rate demonstrates the taxable
distribution rate necessary to produce an after tax distribution rate equivalent
to that of a fund which invests in tax-exempt obligations. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' performance may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore, each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state business trust law, or (3) required to
be voted on separately by class by the 1940 Act, or the rules adopted
thereunder. For instance, if a change to the Rule 12b-1 plan relating to Class I
shares requires shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Voting rights are noncumulative, so that in any election of trustees the holders
of more than 50% of the shares voting can elect all of the trustees, if they
choose to do so and in such event the holders of the remaining shares voting
will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees, such
as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under- reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Code - Internal Revenue Code of 1986, as amended.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share for the applicable class next calculated after we receive your
request in proper form.
Offering price - The public offering price is equal to the net asset value per
share of the class plus the front-end sales charge. The front-end sales charge
is 4.25% for Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
U.S. - United States.
FRANKLIN NEW YORK TAX-EXEMPT MONEY FUND
FRANKLIN NEW YORK TAX-FREE TRUST
PROSPECTUS
May 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin New York Tax-Exempt Money Fund (the "Fund") is a no-load,
non-diversified series of the Franklin New York Tax-Free Trust (the "Trust"), an
open-end management investment company offering individual investors,
corporations and other institutions a convenient way to invest in a
professionally managed portfolio of high quality, short-term municipal
securities, primarily of the state of New York, its political subdivisions and
New York City. The Fund's investment objective is to provide investors with as
high a level of income exempt from federal income taxes and New York State and
New York City personal income taxes as is consistent with prudent investment
management, while seeking preservation of shareholders' capital and liquidity in
its investments.
This prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
this prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items that you will
find useful.
An SAI concerning the Trust, dated May 1, 1996, as may be amended from time to
time, provides a further discussion of certain areas in this prospectus and
other matters which may be of interest to you. It has been filed with the SEC
and is incorporated herein by reference. A copy is available without charge from
the Fund or Distributors, at the address or telephone number shown above.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin New York Tax-Exempt Money Fund?
How Does the Fund Invest Its Assets?.............
What Are the Fund's Potential Risks?.............
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding Taxpayer IRS Certifications
Useful Terms and Definitions
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of the Fund, before fee waivers and expense reductions, for the fiscal
year ended December 31, 1995.
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees........................................0.63%*
Other Expenses:
Shareholder Servicing Costs................0.12%
Reports to Shareholders....................0.07%
Other Expenses.............................0.03%
----
Total Other Expenses...................................0.22%
----
Total Fund Operating Expenses..........................0.85%*
====
*Advisers has agreed in advance to waive a portion of its management fee and to
make certain payments to reduce expenses of the Fund. With this reduction,
management fees and total operating expenses represented 0.37% and 0.60%,
respectively, of the average net assets of the Fund.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses
that apply to a $1,000 investment in the Fund over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of each time
period.
One Year Three Years Five Years Ten Years
$9 $27 $47 $105
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by you
as a result of your investment in the Fund. In addition, federal securities
regulations require the example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
the Fund. The information for each of the five fiscal years in the period ended
December 31, 1995 has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the financial statements in the Trust's
Annual Report to Shareholders for the fiscal year ended December 31, 1995. The
remaining figures, which are also audited, are not covered by the auditors'
current report. See "Reports to Shareholders" under "General Information" in
this prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
Ratio of
Distri- Net Net Expenses Ratio of Net
Net Asset Net Net Realized Total butions Asset Assets To Investment
Year Value Invest- & Unrealized From From Net Value at End Average Income Portfolio
Ended Beginning ment Gains on Investment Investment at End Total of Period Net to Average Turnover
December 31 of Period Income Securities Operations Income of Period Return+ (in 000's) Assets++ Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986* $1.00 $.014 $ - $.014 $(.014) $1.00 1.07% $ 3,825 - %4.27%*** - %
1987** 1.00 .041 - .041 (.041) 1.00 4.17 54,886 .44 4.04 -
1988** 1.00 .044 - .044 (.044) 1.00 4.51 53,877 .46 4.46 -
1989 1.00 .056 - .056 (.056) 1.00 5.75 75,556 .57 5.59 -
1990 1.00 .050 - .050 (.050) 1.00 5.13 92,277 .59 5.02 -
1991 1.00 .036 - .036 (.036) 1.00 3.63 70,503 .69 3.52 -
1992 1.00 .021 - .021 (.021) 1.00 2.10 54,122 .65 2.12 -
1993 1.00 .017 - .017 (.017) 1.00 1.67 50,317 .63 1.68 -
1994 1.00 .021 - .021 (.021) 1.00 2.11 64,835 .60 2.12 -
1995 1.00 .031 - .031 (.031) 1.00 3.11 61,079 .60 3.06 -
</TABLE>
*For the period October 10, 1986 (effective date of registration) to December
31, 1986.
**Restated for change in fiscal year from August 31 to December 31.
***Annualized.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized.
++During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and to make payments of other expenses incurred by the Fund.
Had such action not been taken, the ratio of expenses to average net assets
would have been as follows:
Period Ended Ratio of Expenses to
Dec. 31 Average Net Assets
1987.......................................................... .78%
1988.......................................................... .82
1989.......................................................... .82
1990.......................................................... .79
1991.......................................................... .84
1992.......................................................... .89
1993.......................................................... .97
1994.......................................................... .93
1995.......................................................... .85
What Is the Franklin New York Tax Exempt Money Fund?
The Fund is a no-load, non-diversified series of the Trust, an open-end
management investment company commonly called a "mutual fund." The Trust was
organized as a Massachusetts business trust in July 1986 and registered with the
SEC under the 1940 Act. Shares of the Fund may be considered Class I shares, as
described under "Useful Terms and Definitions," for redemption, exchange and
other purposes.
The Fund attempts to maintain a stable net asset value of $1.00 per share. There
is no assurance, however, that this will be achieved. Although you may write
redemption drafts (similar to checks) against your account, the purchase of
shares of the Fund does not create a checking or other bank account.
How Does the Fund Invest Its Assets?
The Fund's investment objective is to obtain as high a level of income exempt
from federal income taxes and New York State and New York City personal income
taxes as is consistent with prudent investment management, while seeking
preservation of shareholders' capital and liquidity in its investments. As with
any investment, there is no assurance that the Fund's objective will be
achieved. This objective is a fundamental policy of the Fund and may not be
changed without shareholder approval.
Types of Securities the Fund May Purchase
The Fund attempts to invest 100%, and as a matter of fundamental policy, will
invest at least 80%, of its total assets in securities that pay interest exempt
from federal income taxes, including the alternative minimum tax. It is
possible, although not anticipated, that up to 20% of the Fund's total assets
could be in federally taxable obligations.
At least 65% of the Fund's total assets will be invested in high quality
municipal securities and obligations issued by or on behalf of the state of New
York and its local governments, municipalities, authorities, agencies and
political subdivisions ("New York Municipal Securities"). It is possible,
although not anticipated, that up to 35% of the Fund's total assets may be in
municipal securities and obligations of a state or local government other than
New York, and these securities may or may not pay income exempt from New York
State and New York City personal income taxes, including any alternative minimum
tax.
Under normal market conditions, the Fund will invest its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to 100%
of its total assets in money market instruments whose interest may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, the Fund may invest up to 100% of its total assets in money
market instruments the interest on which is exempt from federal income taxes but
not New York State and New York City personal income taxes.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar denominated instruments
which the Board determines present minimal credit risks and which are, as
required by the federal securities laws, rated in one of the two highest rating
categories as determined by nationally recognized statistical rating
organizations, or which are unrated but of comparable quality, with remaining
maturities of 397 calendar days or less ("Eligible Securities"). The Fund
maintains a dollar weighted average maturity of the securities in its portfolio
of 90 days or less.
If a security ceases to be rated in the highest rating category, or Advisers
becomes aware that a security has been rated below the second highest rating
category, not including changes in a security's relative standing within a
category, subsequent to its purchase by the Fund, the Board will promptly
reassess whether the security presents minimal credit risks and shall take such
action as it deems to be in the best interest of the Fund and its shareholders,
unless such security is sold or matures within five business days of Advisers
becoming aware of the new rating category and the trustees are notified of
Advisers' actions. In addition to considering ratings assigned by the rating
services in its selection of portfolio securities for the Fund, Advisers will
consider, among other things, information concerning the financial history and
condition of the issuer, the revenue and expense prospects and, in the case of
revenue bonds, the financial history and condition of the source of revenue to
service the bonds. Because the Fund limits its investments to high quality
securities, the Fund's portfolio will generally earn lower yields than if the
Fund purchased securities with a lower rating and correspondingly greater risk.
The yield to you is accordingly likely to be lower.
Municipal Securities
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession of the U.S. and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from regular federal income
tax. An opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to provide funding for privately
operated facilities. The Fund will buy municipal securities only to the extent
the purchase of such securities would be consistent with the maturity and other
requirements of Rule 2a-7 under the 1940 Act. Further information on the
maturity and funding classifications of municipal securities is included in the
SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities. However, prices of longer term securities typically
fluctuate more than shorter term securities due to changes in interest rates,
tax laws and other general market factors. Lower rated municipal securities
generally produce a higher yield than higher rated municipal securities due to
the perception of a greater degree of risk as to the ability of the issuer to
pay principal and interest obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Code, and under the income tax provisions of
some states. This interest may subject you to, or increase your liability under,
the federal and state alternative minimum tax. In addition, all distributions
derived from interest exempt from regular federal income tax may subject
corporate shareholders to, or increase their liability under, the federal
alternative minimum tax, because these distributions are included in the
corporation's adjusted current earnings. In states with a corporate franchise
tax, distributions of the Fund may also be fully taxable to corporate
shareholders under their state franchise tax systems. Consistent with the Fund's
investment objective, the Fund may acquire these private activity bonds if, in
Advisers' opinion, these bonds represent the most attractive investment
opportunity then available to the Fund. As of December 31, 1995, the Fund
derived 10.71% of its income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors.
Floating and Variable Rate Obligations. The Fund may buy floating and variable
rate obligations. These obligations bear interest at rates that are not fixed,
but that vary with changes in prevailing market rates on predesignated dates.
The Fund may also invest in variable or floating rate demand notes ("VRDNs"),
which carry a demand feature that permits the Fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation, which amount may be more or
less than the amount the Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements.
The Fund may invest in floating rate and variable rate obligations carrying
stated maturities in excess of one year at the date of purchase by the Fund if
such obligations carry demand features that comply with certain conditions and
rules adopted by the SEC. The Fund will limit its purchase of municipal
securities that are floating and variable rate obligations to those meeting the
quality standards set forth in this prospectus. The quality of the underlying
creditor must, as determined by Advisers under the supervision of the Board,
also be equivalent to the quality standards set forth in this prospectus. In
addition, Advisers monitors the earning power, cash flow and other liquidity
ratios of the issuers of such obligations, as well as the creditworthiness of
the institution responsible for paying the principal amount of the obligation
under the demand feature.
Certificates of Participation. The Fund may invest in municipal lease
obligations, primarily through Certificates of Participation ("COPs"). COPs,
which are widely used by state and local governments to finance the purchase of
property, function much like installment purchase agreements. A COP is created
when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities which are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the obligations issued to purchase
the property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPS in
the two highest rating categories of Moody's Investors Service ("Moody's"),
Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch,") or in unrated COPs believed by Advisers to be of comparable quality.
Criteria considered by the rating agencies and Advisers 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 reviews the COPs held in the Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by Advisers and monitored by the Board. These factors are
described in the SAI under "Description of Municipal and Other Securities."
While there is no limit as to the amount of assets that the Fund may invest in
COPs, as of December 31, 1995, 5.73% of the Fund's net assets was invested in
COPs and other municipal leases.
When-Issued and Delayed Delivery. The Fund may buy and sell municipal securities
on a "when-issued" and "delayed delivery" basis. The prices of these securities
are subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring such
securities, it may sell such securities before the settlement date if it is
deemed advisable. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so for the purpose of
acquiring securities for the Fund's portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage.
Other Investment Policies of the Fund
Borrowing. The Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Fund does not currently
intend to do so, consistent with procedures approved by the Board, the Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, provided that such loans do not exceed 10% of the value
of the Fund's total assets at the time of the most recent loan. See the SAI for
more information.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the net assets of the Fund.
Other. The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders, which limit
its activities to some extent. For a list of these restrictions and more
information about the policies discussed herein, please see "How Do the Funds
Invest Their Assets?" and "Investment Restrictions" in the SAI.
What Are the Fund's Potential Risks?
Credit and Market Risk. While an investment in the Fund is not without risk,
certain policies are followed in managing the Fund that may help to reduce that
risk. There are two categories of risks that the Fund is subject to: credit risk
and market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions generally affecting the market as a whole. A
municipal security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's investments may rise. Price changes of securities held by
the Fund have a direct impact on the net asset value per share of the Fund.
Non-diversification. As a non-diversified series of the Trust, the Fund is not
subject to any statutory restriction under the 1940 Act with respect to the
concentration of its investments in the assets of one or more issuers. This
concentration may present greater risks than in the case of a diversified series
of an investment company. (See the SAI for the diversification requirements the
Fund intends to meet in order to qualify as a regulated investment company under
the Code.)
Risk Factors in New York
Since the Fund primarily invests in New York Municipal Securities, there are
certain specific factors and considerations concerning New York State and New
York City that may affect the credit and market risk of the municipal securities
to be purchased by the Fund. The following information is based primarily upon
information derived from public documents relating to securities offerings of
issuers of New York Municipal Securities, from independent municipal credit
reports and historically reliable sources, but has not been independently
verified by the Fund.
The primary purpose of investing in a portfolio of New York Municipal Securities
is the special tax treatment accorded New York resident individual investors.
Payment of interest and preservation of principal, however, is dependent upon
the continuing ability of New York issuers and/or obligors of state, municipal
and public authority debt obligations to meet their obligations thereunder. You
should be aware that certain substantial issuers of New York Municipal
Securities (including issuers whose obligations may be acquired by the Fund)
have experienced financial difficulties in recent years. These difficulties have
at times jeopardized the credit standing and impaired the borrowing abilities of
other New York issuers and have generally contributed to higher interest rates
and lower market prices for their debt obligations. A recurrence of the
financial difficulties previously experienced by such issuers could result in
defaults or declines in the market values of their existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Securities.
As of the date of filing of this prospectus with the SEC, no issuers of New York
Municipal Securities were, to the knowledge of Advisers, in default with respect
to the payment of their debt obligations. The occurrence of any such default
could adversely affect the market values and marketability of all New York
Municipal Securities and, consequently, the net asset value of the Fund's
portfolio. Some of the significant financial considerations relating to the
Fund's investments in New York Municipal Securities are summarized in the SAI.
You should consider the greater risk of the Fund's concentration in New York
Municipal Securities versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on portfolios of New
York issues with those of more diversified portfolios, including out-of-state
issues, before making an investment decision. Advisers believes, however, that
by maintaining the Fund's investment portfolio in liquid, short-term, high
quality investments, including variable and floating rate demand instruments
that have high quality credit support from banks, insurance companies or other
financial institutions, the Fund is largely insulated from the credit risks that
may exist on long-term New York Municipal Securities. The SAI contains a further
description of risks under "Appendix A - Risk Factors Affecting New York
Municipal Securities."
Who Manages the Fund?
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
its day-to-day operations.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (119 separate series) with aggregate
assets of over $81 billion, $42 billion of which is in the municipal securities
market.
Pursuant to a management agreement, Advisers supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities that are necessary to conduct the Fund's business. Advisers performs
similar services for other funds and there may be times when the actions taken
with respect to the Fund's portfolio will differ from those taken by Advisers on
behalf of other funds. Neither Advisers (including its affiliates) nor its
officers, directors or employees nor the officers and trustees of the Trust are
prohibited from investing in securities held by the Fund or other funds which
are managed or administered by Advisers to the extent such transactions comply
with the Trust's Code of Ethics. Please see "Investment Advisory and Other
Services" and General Information" in the SAI for further information on
securities transactions and a summary of the Trust's Code of Ethics.
During the fiscal year ended December 31, 1995, management fees, before any
advance waiver, totaled 0.63% of the average daily net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
0.85% of the average daily net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.37% of the
average daily net assets of the Fund and operating expenses totaling 0.60%. This
arrangement may be terminated by Advisers at any time upon notice to the Board.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions that involve the receipt by the broker of a spread between the bid
and ask prices for the securities and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is Advisers' responsibility to select brokers through whom such
transactions will be effected. Advisers would try to obtain the best execution
on all such transactions. If it is felt that more than one broker would be able
to provide the best execution, Advisers will consider the furnishing of
quotations and of other market services, research, statistical and other data
for Advisers and its affiliates, as well as the sale of shares of the Fund, as
factors in selecting a broker. Further information is included under "How Do the
Funds Purchase Securities For Their Portfolios?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
What Distributions Might I Receive from the Fund?
The Fund declares dividends each day that its net asset value is calculated,
payable to shareholders of record as of the close of business the preceding day.
Daily allocation of net investment income will begin on the day after the Fund
receives your money or settlement of a wire order trade and will continue to
accrue through the day of receipt of your redemption request or the settlement
of a wire order trade.
The daily dividend includes accrued interest and any original issue and market
discount, plus or minus any gain or loss on the sale of portfolio securities and
changes in unrealized appreciation or depreciation in portfolio securities (to
the extent required to maintain a stable net asset value per share), less
amortization of any premium paid on the purchase of portfolio securities and the
estimated expenses of the Fund.
The amount of dividends may fluctuate from day to day and dividends may be
omitted on some days, depending on changes in the factors that comprise the
Fund's net investment income. The Fund does not pay "interest" or guarantee any
amount of dividends or return on an investment in its shares.
Dividend Options
Dividends will automatically be reinvested each day in the form of additional
shares of the Fund at the net asset value per share at the close of business.
If you complete the "Special Payment Instructions for Dividends" section of the
Shareholder Application included with this prospectus, you may direct your
dividends to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
You may also choose to receive dividends in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
If you choose one of these options, the dividends reinvested and credited to
your account during the month will be redeemed as of the close of business on
the last business day of the month and paid as directed on the Shareholder
Application. You may change the dividend option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days for
the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Distributions and Taxation" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to you. Such
exempt-interest dividends are derived from interest income exempt from regular
federal income tax and are not subject to regular federal income tax for you. In
addition, to the extent that exempt-interest dividends are derived from interest
on obligations of New York and its political subdivisions, from interest on
direct obligations of the federal government, or from interest on U.S.
territorial obligations (including Puerto Rico, the U.S. Virgin Islands and
Guam), they will also be exempt from New York State and New York City personal
income taxes. For corporate taxpayers subject to the New York State franchise
tax, however, the foregoing categories of interest income will generally be
taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount, they are treated as ordinary income whether you have elected to
receive them in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in December but
which, for operational reasons, may not be paid to you until the following
January will be treated for tax purposes as if received by you on December 31 of
the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be disallowed to the extent of exempt
interest dividends paid with respect to such shares.
Since the Fund's income is derived from interest 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
December 31, 1995, qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
which constitutes interest income that is a tax preference item under the
alternative minimum tax. If you have not held shares of the Fund for a full
calendar year, you may have designated as tax-exempt or as tax preference income
a percentage of income which is not equal to the actual amount of tax-exempt or
tax preference income earned during the period of your investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includible in the tax base for determining the
extent to which your social security or railroad retirement benefits will be
subject to federal income tax. You are required to disclose the receipt of
tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry Fund shares will not be deductible for federal income tax purposes.
The foregoing description relates solely to federal income tax law and to New
York State and New York City personal income tax treatment to the extent
indicated. You should consult your tax advisor with respect to the applicability
of other state and local income tax laws to distributions and redemption
proceeds received from the Fund. If you are a corporate, individual or trust
shareholder, you should contact your tax advisor to determine the impact of Fund
dividend distributions under the alternative minimum tax that may be applicable
to your particular tax situation.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How Do I Buy Shares?
You may buy shares to open a Fund account with as little as $500 and make
additional investments at any time with as little as $25. You may buy shares at
the net asset value per share of the Fund, without a sales charge. If the Fund
receives your order in proper form before 3:00 p.m. Pacific time, it will be
credited to your account that day. Orders received after 3:00 p.m. will be
credited the following business day.
You may buy shares in any of the following ways:
By Mail
(1) For an initial investment, complete and sign the enclosed Shareholder
Application and return it to the Fund with your check, Federal Reserve
draft or negotiable bank draft payable to the Fund. Instruments drawn on
other investment companies may not be accepted.
(2) For subsequent investments you may send a check or use the deposit slips
included with your monthly statement or checkbook (if you have requested
one). If you send a check, please reference your account number on the
check.
(3) If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
By Wire
(1) Call our Shareholder Services Department at 1-800/632-2301 or, if that
number is busy, you may call 1-415/312-2000 collect. When you call, tell us
that funds will be wired for investment and we will give you a wire control
number. It is necessary to obtain a new wire control number every time you
wire money into your account. If you wire money without a currently
effective wire control number, we will return the money to the bank that
wired it and it will not be credited to your account.
(2) Wire the funds to Bank of America, ABA routing number 121000358, for credit
to Franklin New York Tax-Exempt Money Fund, A/C 1493-3-04779. Your name and
the wire control number must be included. Wired funds received by the bank
and reported by the bank to the Fund by 3:00 p.m. Pacific time are normally
credited that day. Later wires are credited the following business day.
(3) For an initial investment you must also send a completed Shareholder
Application to the Fund to assure the wire is credited properly.
Through A Securities Dealer
You may buy shares of the Fund through a securities dealer. In certain states
you may only buy shares through a registered securities dealer. Your securities
dealer may charge you a fee for handling the order.
General
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Many of the Fund's investments must be paid for in federal funds, which are
monies held by the Fund's custodian bank on deposit at the Federal Reserve Bank
of San Francisco and elsewhere. The Fund generally cannot invest money received
from you until it is converted into and is available to the Fund in federal
funds. Therefore, your order may not be considered in proper form until the
money received from you is available in federal funds, which may take up to two
days. If the Fund is able to make investments immediately (within one business
day), it may accept your order with payment in other than federal funds.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers and
Trustees."
What Programs and Privileges Are Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and any capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you each month to reflect the daily
dividends reinvested during the month and after each other transaction which
affects your account, except when you sell your shares by check. This statement
will also show the total number of shares you own, including the number of
shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this prospectus for the requirements of the program
or contact your investment representative. You may terminate the program at any
time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.
You may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. While a Systematic Withdrawal Plan is in effect, shares must be
held either in plan balance or, where share certificates are outstanding,
deposited with the Fund. Payments under the plan will be made from the
redemption of an equivalent amount of shares in your account, generally on the
first business day of the month in which a payment is scheduled. You will
generally receive your payments within three to five days after the shares are
redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
If a withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than your actual yield or income, part of the payment may be a return of your
investment.
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
If you would like to establish a Systematic Withdrawal Plan, contact Shareholder
Services at the number shown under "How Do I Get More Information About My
Investment?"
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Rights of Accumulation
You may include the cost or current value (whichever is higher) of your shares
of the Fund when determining whether you may buy shares of another Franklin
Templeton Fund at a discount. You may also include your shares of the Fund
towards the completion of a Letter of Intent established in connection with the
purchase of shares of another Franklin Templeton Fund.
Multiple Accounts for Fiduciaries
Special procedures have been designed for banks and other institutions that
would like to open multiple accounts in the Fund. Further information is
included in the SAI.
Institutional Accounts
There may be additional methods of buying, selling or exchanging shares of the
Fund available to institutional accounts. For further information, contact the
Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums.
No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/24753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Shares of the Fund acquired other than pursuant to the exchange privilege or the
reinvestment of dividends with respect to such shares, may be exchanged at the
offering price of other Class I shares of the Franklin Templeton Funds.
Exchanges will be effected at the respective net asset values or offering prices
of the funds involved at the close of business on the day on which the request
is received in proper form.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Market Timers
The Fund currently will not accept investments from Market Timers.
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
By Check
The Fund will supply you with redemption drafts, which are similar to checks and
are referred to as checks throughout this prospectus, if you have requested them
on the Shareholder Application. The election of the check redemption procedure
does not create a checking account or other bank account relationship between
you and the Fund or any bank. These checks are drawn through the Fund's
custodian, Bank of America NT & SA (the "Bank"). You will generally not be able
to convert a check drawn on your Fund account into a certified or cashier's
check by presentation at the Bank. You may make checks payable to the order of
any person in any amount not less than $100. There is no charge to you for this
check redemption procedure.
When a check is presented for payment, the Fund will redeem a sufficient number
of full and fractional shares in your account to cover the amount of the check.
This enables you to continue earning daily income dividends until the check has
cleared. Shares will be redeemed at their net asset value next determined after
receipt of a check that does not exceed the collected balance of the account.
Only shareholders having accounts in which no share certificates have been
issued will be permitted to redeem shares by check.
Because the Fund is not a bank, no assurance can be given that stop payment
orders on checks written by you will be effective. The Fund, however, will use
its best efforts to see that these orders are carried out.
You will be subject to the right of the Bank to return unpaid checks in amounts
exceeding the collected balance of your account at the time the check is
presented for payment. Checks should not be used to close your Fund account
because when a check is written, you will not know the exact total value of your
account on the day the check clears. The Bank reserves the right to terminate
this service at any time upon notice to shareholders.
By Mail
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. You are requested to provide a telephone number where you may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
that are members of a national securities exchange or a clearing agency or that
have minimum net capital of $100,000; or (4) institutions that participate in
the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
When shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
You may sell shares of the Fund by calling Investor Services at 1-800/632-2301.
Payment of redemption requests of $1,000 or less (once per business day) will be
sent to the address of record on your account. For payments over $1,000, you
must complete the "Wire Redemption Privilege" section of the Shareholder
Application. Proceeds will then be wired directly to the commercial bank or
brokerage firm designated by you. Wires will not be sent for redemption requests
of $1,000 or less.
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this prospectus, you may have
redemption proceeds of over $1,000, up to $50,000 per day per Fund account, sent
directly to your address of record. You may obtain additional information about
telephone redemptions by writing to the Fund or Investor Services at the address
shown on the cover or by calling the number above. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions given by
telephone are genuine. You, however, bear the risk of loss in certain cases as
described under "Telephone Transactions Verification Procedures."
Telephone redemption requests received before 3:00 p.m. Pacific time on any
business day will be processed that same day. The redemption check will be sent
within seven days, made payable to all the registered owners on the account, and
will be sent only to the address of record. Wire payments will be transmitted
the next business day following receipt prior to 3:00 p.m. Pacific time of a
request for redemption in proper form. You may wish to allow for a longer
processing time if you want to assure that redemption proceeds will be available
at a certain time for a specific transaction. You may be able to have redemption
proceeds wired to an escrow account the same day, provided that the request is
received prior to 9:00 a.m. Pacific time.
No shares for which share certificates have been issued may be redeemed by
telephone. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In either case, you should follow the
other redemption procedures set forth in this prospectus. Institutional accounts
that wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The
documents described under "By Mail" above, as well as a signed letter of
instruction, are required regardless of whether you redeem shares directly or
submit such shares to a securities dealer for repurchase. Your letter should
reference the Fund, the account number, the fact that the repurchase was ordered
by a dealer and the dealer's name. Details of the dealer-ordered trade, such as
trade date, confirmation number, and the amount of shares or dollars, will help
speed processing of the redemption. The seven-day period within which the
proceeds of your redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
The Fund does not impose either a front-end or a contingent deferred sales
charge. If, however, shares redeemed were acquired by exchange from another
Franklin Templeton Fund that would have assessed a contingent deferred sales
charge upon redemption, such charge will be made by the Fund, as described
below. The 12-month contingency period will be tolled (or stopped) for the
period these shares are exchanged into and held in the Fund.
In order to recover commissions paid to securities dealers on investments of $1
million or more, certain Franklin Templeton Funds impose a contingent deferred
sales charge on certain redemptions within 12 months of the calendar month of
such investment. The charge is 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the net asset value at the time of purchase of such shares, and is retained by
Distributors.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested.
Wiring of redemption proceeds is a special service made available to you
whenever possible. The offer of this service, however, does not bind the Fund to
meet any redemption request by wire in less than the seven-day period prescribed
by law. Neither the Fund nor its agents shall be liable to you or any other
person for a redemption payment by wire that for any reason may not be processed
as described in this section.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this prospectus by telephone. In addition, you may be
able to redeem shares of the Fund, as described under "How Do I Sell Shares? -
By Telephone".
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined at 3:00 p.m. Pacific
time each day that the Exchange is open for trading. The net asset value per
share of the Fund is determined by deducting the aggregate gross value of all
liabilities from the aggregate gross value of all assets, and then dividing the
difference by the number of shares outstanding. Assets in the Fund's portfolio
are valued as described under "How Are Fund Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this prospectus.
From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin account
and request duplicate confirmation or year-end statements, money fund checks and
deposit slips.
The Fund code, which will be needed to access system information, is 131. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current and effective yield, and
tax equivalent and tax equivalent effective yield.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is an annualized
percentage rate that reflects the change in value of a hypothetical account
based on the income received from the Fund during a seven-day period. It is
computed by determining the net change, excluding capital changes, in the value
of a hypothetical pre-existing account having a balance of one share at the
beginning of the period. A hypothetical charge reflecting deductions from
shareholder accounts for management fees or shareholder services fees, for
example, is subtracted from the value of the account at the end of the period,
and the difference is divided by the value of the account at the beginning of
the base period to obtain the base period return. The result is then annualized.
Effective yield is computed in the same manner, except the annualization of the
return for the seven-day period reflects the results of compounding (that is,
the effect of reinvesting dividends paid on both the original share and those
acquired from the reinvestment of such dividends).
Tax equivalent yield demonstrates the yield from a taxable investment necessary
to produce an after-tax yield equivalent to that of a fund which invests in
tax-exempt obligations. It is computed by dividing the tax-exempt portion of a
fund's yield (calculated as indicated) by one minus a stated income tax rate and
adding the product to the taxable portion (if any) of the fund's yield.
Tax equivalent effective yield demonstrates the effective yield from a taxable
investment necessary to produce an after-tax effective yield equivalent to that
of a fund which invests in tax-exempt obligations. It is computed in the same
manner as a fund's tax equivalent yield, except it is based on the tax-exempt
portion of a fund's effective, rather than its current, yield. The figure is
calculated by dividing the tax-exempt portion of a fund's effective yield by one
minus a stated income tax rate and adding the product to the taxable portion (if
any) of the fund's effective yield.
In each case, performance figures are based upon past performance and reflect
all recurring charges against Fund income. They will reflect the value of any
additional shares purchased with dividends from the original share and any
dividends declared on both the original share and additional shares. The
investment results of the Fund, like all other investment companies, will
fluctuate over time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the Fund's
performance may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series. Shares issued will be
fully paid and non-assessable and will have no preemptive, conversion, or
sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions as declared by such series and the net assets of
such series upon liquidation or dissolution. Additional series may be added in
the future by the Board.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees, such
as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $250, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Other Information
Shares of the Fund may or may not constitute a legal investment for investors
whose investment authority is restricted by applicable law or regulation. SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations.
Registering Your Account
An account registration should reflect your intentions as to ownership.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer, and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment and withhold 31% of any such payments made to individuals and
other non-exempt shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required certifications that
appear in the Shareholder Application. You may also be subject to backup
withholding if the IRS or a securities dealer notifies the Fund that the number
furnished by you is incorrect or that you are subject to backup withholding for
previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Fund Trust.
Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the trustees. Certain funds in the
Franklin Templeton Funds currently offer their shares in two classes, designated
"Class I" and "Class II." Shares of the Fund may be considered Class I shares
for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.
Offering price - The public offering price of a fund is equal to the net asset
value per share plus the applicable sales charge.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
U.S. - United States.
FRANKLIN NEW YORK
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
Franklin New York Tax-Free Trust
PROSPECTUS May 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin New York Intermediate-Term Tax-Free Income Fund (the "Fund") is a
non-diversified series of the Franklin New York Tax-Free Trust (the "Trust"), an
open-end management investment company. The Fund offers individual investors,
corporations and other institutions a convenient way to invest in a
professionally managed portfolio of municipal securities, primarily issued by
the state of New York and its political subdivisions. The Fund's investment
objective is to provide investors with as high a level of income exempt from
federal income taxes and New York State and New York City personal income taxes
as is consistent with prudent investment management and the preservation of
shareholders' capital. The Fund intends to invest primarily in a portfolio of
investment grade obligations with a dollar weighted average portfolio maturity
of more than three years but not more than ten years.
This prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
this prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items that you will
find useful.
An SAI concerning the Trust, dated May 1, 1996, as may be amended from time to
time, provides a further discussion of certain areas in this prospectus and
other matters that may be of interest to you. It has been filed with the SEC and
is incorporated herein by reference. A copy is available without charge from the
Fund or Distributors, at the address or telephone number shown above.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table 2
Financial Highlights -
How Has the Fund Performed? 4
What Is the Franklin New York Intermediate-
Term Tax-Free Income Fund? 4
How Does the Fund Invest Its Assets? 4
What Are the Fund's Potential Risks? 8
How You Participate in the
Results of the Fund's Activities 10
Who Manages the Fund? 10
What Distributions Might
I Receive from the Fund? 12
How Taxation Affects You and the Fund 13
How Do I Buy Shares? 15
What Programs and Privileges
Are Available to Me as a Shareholder? 19
What If My Investment Outlook Changes? -
Exchange Privilege 21
How Do I Sell Shares? 23
Telephone Transactions 27
How Are Fund Shares Valued? 27
How Do I Get More Information
About My Investment? 28
How Does the Fund Measure Performance? 28
General Information 29
Registering Your Account 30
Important Notice Regarding
Taxpayer IRS Certifications 31
Useful Terms and Definitions 32
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of the Fund, before fee waivers and expense reductions, for the fiscal
year ended December 31, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... 2.25%
Deferred Sales Charge.................................. None+
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees........................................ 0.63%*
Rule 12b-1 Fees........................................ 0.09%**
Other Expenses:
Reports to Shareholders...................... 0.02%
Shareholder Servicing Costs.................. 0.03%
Other........................................ 0.06%
------
Total Other Expense.................................... 0.11%
Total Fund Operating Expenses.......................... 0.83%*
+Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge."
*The Manager has agreed in advance to waive a portion of its management fee and
to make certain payments to reduce expenses of the Fund. With this reduction,
management fees and total operating expenses represented 0.13% and 0.33%,
respectively, of the average net assets of the Fund.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.10%. See "Who Manages the Fund? - Plan of Distribution."
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this prospectus.
Example
As required by SEC regulations, the following example illustrates the projected
expenses, including the maximum front-end sales charge, that apply to a $1,000
investment in the Fund over various time periods assuming (1) a hypothetical 5%
annual rate of return and (2) redemption at the end of each time period.
One Year Three Years Five Years Ten Years
$31* $48 $68 $123
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF ACTUAL PAST OR FUTURE EXPENSES OR EXPECTED RETURNS YOU WOULD
RECEIVE, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are
borne by the Fund and only indirectly by you as a result of your investment in
the Fund. In addition, federal securities regulations require the example to
assume a hypothetical annual return of 5%, but the Fund's actual return may be
more or less than 5%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
the Fund. The information in the table for the period ended December 31, 1992
and for each of the three fiscal years ended December 31, 1995 has been audited
by Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders for the
year ended December 31, 1995. See "Reports to Shareholders" under "General
Information" in this prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
- ----------------------------------------------------------------------------------- ------------------------------------------
Net Net Realized Distri- Net Net Ratio of Ratio of Net
Asset Net & Unrealized butions Asset Assets Expenses Investment
Period Value Invest- Gains Total From From Net Value at End to Average Income Portfolio
Ended Beginning ment (Losses)on Investment Investment at End Total of Period Net to Average Turnover
December 31 of Period Income Securities Operations Income of Year Return+ (in 000's) Assets++ Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992* $10.00 $.090 $ .135 $ .225 $(.015) $10.21 2.25% $ 3,459 -% 4.41%** 20.80%
1993 10.21 .480 .536 1.016 (.546) 10.68 10.18 31,162 - 4.96 30.95
1994 10.68 .550 (1.104) (.554) (.526) 9.60 (5.42) 35,166 .05 5.57 188.38
1995 9.60 .550 .795 1.345 (.545) 10.40 14.31 43,229 .33 5.51 24.68
</TABLE>
*For the period September 21, 1992 (effective date of registration) to December
31, 1992.
**Annualized
+Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge or the contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains, if any, at net asset value.
++During the periods indicated, the Manager agreed in advance to waive a portion
of its management fees and to make payments to reduce expenses of the Fund. Had
such action not been taken, the ratio of expenses to average net assets would
have been as follows:
Ratio of Expenses
to Average Net Assets
1992*,**.................... 1.76%
1993........................ 0.73%
1994........................ 0.80%
1995....................... 0.83%
What Is the Franklin New York Intermediate-Term Tax-Free Income Fund?
The Fund is a non-diversified series of the Trust, an open-end management
investment company, commonly called a "mutual fund." The Trust was organized as
a Massachusetts business trust in July 1986 and registered with the SEC under
the 1940 Act. Shares of the Fund may be considered Class I shares, as described
under "Useful Terms and Definitions," for redemption, exchange and other
purposes.
How Does the Fund Invest Its Assets?
The Fund's investment objective is to provide investors with as high a level of
income exempt from federal income taxes and New York State and New York City
personal income taxes as is consistent with prudent investment management and
the preservation of shareholders' capital. The objective is a fundamental policy
of the Fund and may not be changed without shareholder approval. The Fund seeks
to achieve its objective by investing primarily in a portfolio of investment
grade obligations with a dollar weighted average portfolio maturity of more than
three years but not more than ten years. As with any investment, there is no
assurance that the Fund's objective will be achieved.
The Fund attempts to invest 100% and, as a matter of fundamental policy, will
invest at least 80% of its total assets in securities that pay interest exempt
from federal income taxes, including the alternative minimum tax. It is
possible, although not anticipated, that up to 20% of the Fund's total assets
could be in federally taxable obligations.
At least 65% of the Fund's total assets will be invested in municipal securities
and obligations issued by or on behalf of the state of New York and its local
governments, municipalities, authorities, agencies and political subdivisions
("New York Municipal Securities"). It is possible, although not anticipated,
that up to 35% of the Fund's total assets may be in municipal securities of a
state or local government other than New York and these securities may or may
not pay income exempt from New York State and New York City personal income
taxes, including any alternative minimum tax.
The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities that are not rated, provided that, in the opinion of the
Manager, such securities are comparable in quality to those within the four
highest ratings. These are considered to be "investment grade" securities,
although bonds rated in the fourth highest ratings level (Baa by Moody's) are
regarded as having an adequate capacity to pay principal and interest but with
greater vulnerability to adverse economic conditions and as having some
speculative characteristics. In the event the rating of an issue held in the
Fund's portfolio is lowered by the rating services, such change will be
considered by the Fund in its evaluation of the overall investment merits of
that security but such change will not necessarily result in an automatic sale
of the security. For a description of municipal securities ratings, see
"Appendix B - Description of Municipal Securities Ratings" in the SAI.
Under normal market conditions, the Fund will invest its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to 100%
of its total assets in securities whose interest may be subject to federal
income tax, including the alternative minimum tax. Also for temporary defensive
purposes, the Fund may invest up to 100% of its total assets in (i) municipal
securities and obligations of state and local government other than New York;
(ii) commercial paper rated at least A-1 by S&P, P-1 by Moody's or F-1 by Fitch
or (iii) obligations issued or guaranteed by the full faith and credit of the
U.S. government.
Municipal Securities
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession of the U.S. and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities. Prices of longer term securities, however, typically
fluctuate more than short term securities due to changes in interest rates, tax
laws and other general market conditions. Lower-rated municipal securities
generally produce a higher yield than higher-rated municipal securities due to
the perception of a greater degree of risk as to the ability of the issuer to
pay principal and interest obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain "private activity bonds" issued after August 7,
1986, while still tax-exempt, constitutes a preference item for taxpayers in
determining the federal alternative minimum tax under the Code, and under the
income tax provisions of some states. This interest may subject you to, or
increase your liability under, the federal and state alternative minimum tax. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject corporate shareholders to, or increase their liability
under, the federal alternative minimum tax, because such distributions are
included in the corporation's adjusted current earnings. In states with a
corporate franchise tax, distributions of the Fund may also be fully taxable to
corporate shareholders under their state franchise tax systems. Consistent with
the Fund's investment objective, the Fund may acquire such private activity
bonds if, in the Manager's opinion, such bonds represent the most attractive
investment opportunity then available to the Fund. As of December 31, 1995, the
Fund derived 4.45% of its income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors.
Floating and Variable Rate Obligations. The Fund may buy floating and variable
rate obligations. These obligations bear interest at rates that are not fixed,
but that vary with changes in prevailing market rates on predesignated dates.
The Fund may also invest in variable or floating rate demand notes ("VRDNs"),
which carry a demand feature that permits the Fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligations, which amount may be more or
less than the amount the Fund paid for such obligation. Frequently, VRDNs are
secured by letters of credit or other credit support arrangements. The Fund will
limit its purchase of municipal securities that are floating and variable rate
obligations to those meeting the quality standards set forth in this prospectus.
When-Issued and Delayed Delivery. The Fund may buy and sell municipal securities
on a "when-issued" and "delayed delivery" basis. The price is subject to market
fluctuation, and the value at delivery may be more or less than the purchase
price. Although the Fund will generally buy municipal securities on a
when-issued basis with the intention of acquiring such securities, it may sell
such securities before the settlement date if it is deemed advisable. When the
Fund is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments, until payment
is made. To the extent the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with its investment objective and policies and not
for the purpose of investment leverage.
Certificates of Participation. The Fund may also invest in municipal lease
obligations, primarily through Certificates of Participation ("COPs"). COPs,
which are widely used by state and local governments to finance the purchase of
property, function much like installment purchase agreements. A COP is created
when long-term lease revenue bonds are issued by a governmental corporation to
pay for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs may enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease annually without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
when faced with increasingly tight budgets, have more discretion to curtail
payments under COPs than they do to curtail payments on traditionally funded
debt obligations. If the government lessee does not appropriate sufficient
monies to make lease payments, the lessor or its agent is typically entitled to
repossess the property. The private sector value of the property may be less
than the amount the government lessee was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the Manager in assessing such risk include the issuing
municipality's credit rating, evaluation of how essential the leased property is
to the municipality and the term of the lease compared to the useful life of the
leased property. The Board reviews the COPs held in the Fund's portfolio to
assure that they constitute liquid investments based on various factors reviewed
by the Manager and monitored by the Board. Such factors include (a) the credit
quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of quality comparable to the rating required for Fund investment,
including an assessment of the likelihood that the leases will not be canceled;
(b) the size of the municipal securities market, both in general and with
respect to COPs; and (c) the extent to which the type of COPs held by the Fund
trade on the same basis and with the same degree of dealer participation as
other municipal bonds of comparable credit rating or quality. While there is no
limit as to the amount of assets which the Fund may invest in COPs, as of
December 31, 1995, the Fund held 24.07% of its net assets in COPs or other
municipal leases.
Callable Bonds. The Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for 5 to 10 years, after which time such bonds may be called away.
An issuer may generally be expected to call its bonds, or a portion of them,
during periods of relatively declining interest rates, when borrowings may be
replaced at lower rates than those obtained in prior years. If the proceeds of a
bond called under such circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of such
bonds included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the Fund,
depending on the price at which such bonds were redeemed. Notwithstanding the
call feature, any such investment would still be subject to the policy whereby
the Fund is required to maintain a dollar weighted average portfolio maturity
between three and ten years.
Other Investment Policies of the Fund
Borrowing. The Fund may borrow from banks for temporary or emergency purposes
and pledge up to 5% of its total assets therefore. Although the Fund does not
currently intend to do so, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan.
Illiquid Investments. It is the policy of the Fund that restricted securities
and other illiquid securities (securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the Fund has valued the securities) may not constitute, at the time of purchase,
more than 10% of the value of the net assets of the Fund.
Portfolio Turnover. The Fund's portfolio turnover rate for the fiscal years
ended December 31, 1994 and 1995 was 188.38% and 24.68%, respectively. The
higher portfolio turnover rate for the fiscal year ended December 31, 1994 was
due to a repositioning of the Fund for defensive purposes. High portfolio
turnover may increase transaction costs which must be paid by the Fund.
Other. The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders, which limit
its activities to some extent. For a list of these restrictions and more
information about the policies discussed herein, please see "How Does the Fund
Invest Its Assets?" and "Investment Restrictions" in the SAI.
What Are the Fund's Potential Risks?
Credit and Market Risk. While an investment in the Fund is not without risk,
certain policies are followed in managing the Fund that may help to reduce such
risk. There are two categories of risks that the Fund is subject to: credit risk
and market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions generally affecting the market as a whole. A
municipal security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's investments may rise. Price changes of securities held by
the Fund have a direct impact on the net asset value per share of the Fund.
Since the Fund primarily invests in New York Municipal Securities, there are
certain specific factors and considerations concerning New York which may affect
the credit and market risk of the municipal securities that the Fund may
purchase. See "Risk Factors in New York" for a discussion of these factors.
Non-diversification. As a non-diversified investment company, the Fund is not
subject to any statutory restriction under the 1940 Act with respect to the
concentration of its investments in the assets of one or more issuers. This
concentration may present greater risks than in the case of a diversified
company. (See the SAI for the diversification requirements the Fund intends to
meet in order to qualify as a regulated investment company under the Code.)
Risk Factors in New York
Since the Fund primarily invests in New York Municipal Securities, there are
certain specific factors and considerations concerning New York State and New
York City which may affect the credit and market risk of the municipal
securities that the Fund may purchase. The following information is based
primarily upon information derived from public documents relating to securities
offerings of issuers of New York Municipal Securities, from independent
municipal credit reports and historically reliable sources, but has not been
independently verified by the Fund.
The primary purpose of investing in a portfolio of New York Municipal Securities
is the special tax treatment accorded New York resident individual investors.
Payment of interest and preservation of principal, however, is dependent upon
the continuing ability of the New York issuers and/or obligors of state,
municipal and public authority debt obligations to meet their obligations
thereunder. You should be aware that certain substantial issuers of New York
Municipal Securities (including issuers whose obligations may be acquired by the
Fund) have experienced financial difficulties in recent years. These
difficulties have at times jeopardized the credit standing and impaired the
borrowing abilities of other New York issuers and have generally contributed to
higher interest rates and lower market prices for their debt obligations. A
recurrence of the financial difficulties previously experienced by such issuers
could result in defaults or declines in the market values of their existing
obligations and, possibly, in the obligations of other issuers of New York
Municipal Securities.
As of the date of the filing of this prospectus with the SEC, no issuers of New
York Municipal Securities were, to the knowledge of the Manager, in default with
respect to the payment of their debt obligations. The occurrence of any such
default, however, could adversely affect the market values and marketability of
all New York Municipal Securities and, consequently, the net asset value of the
Fund's portfolio. Some of the significant financial considerations relating to
the Fund's investments in New York Municipal Securities are summarized in the
SAI.
You should consider the greater risk of the Fund's concentration in New York
Municipal Securities versus the safety that comes with a less concentrated
investment portfolio and should compare yields available on portfolios of New
York issues with those of more diversified portfolios, including out-of-state
issues, before making an investment decision. The Manager believes, however,
that by maintaining the Fund's investment portfolio in New York Municipal
Securities which are rated investment grade, the Fund is largely insulated from
the credit risks that may exist on long-term New York Municipal Securities. The
SAI contains a further description under "Appendix A Risk Factors Affecting New
York Municipal Securities."
How You Participate in the
Results of the Fund's Activities
If the securities owned by the Fund increase in value, the value of the shares
of the Fund which you own will increase. If the securities owned by the Fund
decrease in value, the value of your shares will also decline. In this way, you
participate in any change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader bond markets. In particular,
changes in interest rates will affect the value of the Fund's portfolio and thus
its share price. Increased rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a negative effect on the
value of Fund shares. History reflects both increases and decreases in the
prevailing rate of interest and these may reoccur unpredictably in the future.
Who Manages the Fund?
The Board has the primary responsibility for the overall management of the Trust
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (119 separate series) with aggregate
assets of over $81 billion, $42 billion of which is in the municipal securities
market.
The team responsible for the day-to-day management of the Fund's portfolio is:
Mr. Kenny since 1994 and Mr. Pinkham and Ms. Wong since 1992.
Thomas Kenny
Senior Vice President
and Portfolio Manager of Advisers
Mr. Kenny is the Director of Franklin's Municipal Bond Department. He holds a
Master of Science degree in finance from Golden Gate University and a Bachelor
of Arts degree in business and economics from the University of California at
Santa Barbara. Mr. Kenny joined Franklin in 1986. He is a member of several
municipal securities industry-related committees and associations.
John B. Pinkham
Vice President and
Portfolio Manager of Advisers
Mr. Pinkham has a Bachelor of Science degree in business from Columbia
University. He has been in the securities industry since 1956 and with Advisers
since 1985. He is a member of the Financial Analysts Federation.
Stella Wong
Portfolio Manager of Advisers
Ms. Wong holds a Master's degree in Financial Planning from Golden Gate
University and a Bachelor of Science degree in business administration from San
Francisco State University. She joined Advisers in 1986. She is a member of
several securities industry-related committees and associations.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
During the fiscal year ended December 31, 1995, management fees, before any
advance waiver, totaled 0.63% of the average net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
0.83% of the average net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.13% of the
average net assets of the Fund and operating expenses totaling 0.33%. This
arrangement may be terminated by the Manager at any time upon notice to the
Board.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions that involve the receipt by the broker of a spread between the bid
and ask prices for the securities and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
such transactions will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker
would be able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
the Fund, as factors in selecting a broker. Further information is included
under "How Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by Distributors or
others in the promotion and distribution of the Fund's shares. Such expenses may
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Trust on behalf of the Fund, Distributors or its
affiliates.
The maximum amount which the Fund may reimburse Distributors or others for
distribution expenses is 0.10% per annum of its average daily net assets,
payable on a quarterly basis. All expenses of distribution in excess of 0.10%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund.
The Plan also covers any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plan are included in the maximum operating
expenses which may be borne by the Fund. For more information, including a
discussion of the Board's policies with regard to the amount of Plan fees,
please see "The Fund's Underwriter" in the SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of such year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund may make one
distribution derived from net short-term and net long-term capital gains in any
year or adjust the timing of its distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board of Trustees without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. Daily allocation of net investment income will begin on the day after the
Fund receives your money or settlement of a wire order trade and will continue
to accrue through the day of receipt of your redemption request or the
settlement of a wire order trade.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge) by reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the Fund. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the reinvestment
date for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, the Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders. Such
exempt-interest dividends are derived from interest income exempt from regular
federal income tax, and are not subject to regular federal income tax for you.
In addition, to the extent that exempt-interest dividends are derived from
interest on obligations of New York and its political subdivisions, from
interest on direct obligations of the federal government, or from interest on
U.S. territorial obligations (including Puerto Rico, the U.S. Virgin Islands or
Guam), they will be exempt from New York State and New York City personal income
taxes. For corporate taxpayers subject to the New York State franchise tax,
however, the foregoing categories of interest income will generally be taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount, and such market discount
exceeds a de minimis amount. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to you will be subject to regular income tax in your hands. In any fiscal year,
the Fund may elect not to distribute to you its taxable ordinary income and,
instead, to pay federal income or excise taxes on this income at the Fund level.
The amount of such distributions, if any, is expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
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
December 31, 1995 qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
which constitutes taxable income or interest income that is a tax preference
item under the alternative minimum tax. If you have not held shares of the Fund
for a full calendar year, you may have designated as tax-exempt or as tax
preference income a percentage of income which is not equal to the actual amount
of tax-exempt or tax preference income earned during the period of your
investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includible in the tax base for determining the
extent to which a shareholder's social security or railroad retirement benefits
will be subject to federal income tax. You are required to disclose the receipt
of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry Fund shares will not be deductible for federal income tax purposes.
The foregoing description relates solely to federal income tax law and to New
York State and New York City personal income tax treatment to the extent
indicated. You should consult your tax advisor with respect to the applicability
of other state and local income tax laws to distributions and redemption
proceeds received from the Fund. Whether you are a corporate, individual or
trust shareholder, you should contact your tax advisor to determine the impact
of Fund dividends and capital gain distributions under the alternative minimum
tax that may be applicable to your particular tax situation.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. To open your account,
contact your investment representative or complete and sign the enclosed
Shareholder Application and return it to the Fund with your check.
Purchase Price of Fund Shares
You may buy shares at the public offering price, unless you qualify to purchase
shares at a discount or without a sales charge as discussed below. The offering
price will be calculated to two decimal places using standard rounding criteria.
Quantity Discounts in Sales Charges
The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
Net Amount Allowed
Net Amount to Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
<S> <C> <C> <C>
Under $100,000............................... 2.25% 2.30 2.00%
$100,000 but less than 250,000............... 1.75% 1.78 1.50%
$250,000 but less than 500,000............... 1.25% 1.26 1.00%
$500,000 but less than 1,000,000............. 1.00% 1.01 0.85%
$1,000,000 or more .......................... None** None None***
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Fund shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 1.75%.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive from the Fund?" or call Shareholder Services at
1-800/632-2301; or
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days.
(iii) an annuity payment received under either an annuity option or from death
benefit proceeds, provided that the annuity contract offers as one underlying
investment option the Franklin Valuemark Funds, Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You must return the payment within 365 days of its payment
date. You should contact your tax advisor for information on any tax
consequences of these purchases.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money within 365 days of the redemption date. You may reinvest up to the
total amount of the redemption proceeds under this privilege. If a different
class of shares is purchased, the full front-end sales charge must be paid at
the time of purchase of the new shares. While you will receive credit for any
contingent deferred sales charge paid on the shares redeemed, a new contingency
period will begin. Shares that were no longer subject to a contingent deferred
sales charge will be reinvested at net asset value and will not be subject to a
new contingent deferred sales charge. Shares exchanged into other Franklin
Templeton Funds are not considered "redeemed" for this privilege (see "What If
My Investment Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If you or
your account is included in one of the categories below, none of the shares of
the Fund you purchase will be subject to front-end or contingent deferred sales
charges:
(i) registered securities dealers and their affiliates, for their investment
accounts only;
(ii) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(iii) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in comprehensive
fee programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or by
another registered investment advisor affiliated with that broker;
(iv) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or the Manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(v) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(vi) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(vii) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(viii) accounts managed by the Franklin Templeton Group; or
(ix) certain unit investment trusts and unit holders of these trusts reinvesting
distributions from the trusts in the Fund.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this written
statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
General
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of $1 million or more: 0.75% on sales of $1
million but less than $2 million, plus 0.60% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraph (vi) under
"Purchases at Net Asset Value" above. Please see "How Do I Buy and Sell Shares?"
in the SAI for the breakpoints applicable to these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers and
Trustees."
What Programs and Privileges Are
Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of buying, selling or exchanging shares of the
Fund available to institutional accounts. For further information, contact the
Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums.
No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund in accordance with the
procedures set forth above. Because the exchange is considered a redemption and
purchase of shares, you may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this prospectus and under "Additional Information
Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term, tax-exempt municipal
securities and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Market Timers
The Fund currently will not accept investments from Market Timers.
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
By Mail
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the Exchange, (generally 1:00
p.m. Pacific time) each day that the Exchange is open for trading. You are
requested to provide a telephone number where you may be reached during business
hours, or in the evening if preferred. Investor Services' ability to contact you
promptly when necessary will speed the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
that are members of a national securities exchange or a clearing agency or that
have minimum net capital of $100,000; or (4) institutions that participate in
the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
When shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this prospectus, you may redeem
shares of the Fund by telephone. You may obtain additional information about
telephone redemptions by writing to the Fund or Investor Services at the address
shown on the cover or by calling 1-800/632-2301. The Fund and Investor Services
will employ reasonable procedures to confirm that instructions given by
telephone are genuine. You, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this prospectus. Institutional accounts
(certain corporations, bank trust departments and government entities that
qualify to purchase shares at net asset value pursuant to the terms of this
prospectus) that wish to execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers, who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer-ordered trade, such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the redemption. The seven-day
period within which the proceeds of your redemption will be sent will begin when
the Fund receives all documents required to complete ("settle") the repurchase
in proper form. Your dealer may charge a fee for handling the order. See "How Do
I Buy and Sell Shares?" in the SAI for more information on the redemption of
shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: specified
net asset value purchases discussed under "How Do I Buy Shares? - Purchases at
Net Asset Value"; exchanges; any account fees; redemptions initiated by the Fund
due to an account falling below the minimum specified account size; redemptions
following the death of the shareholder or beneficial owner; and redemptions
through a Systematic Withdrawal Plan set up for shares prior to February 1,
1995, and for Systematic Withdrawal Plans set up thereafter, redemptions of up
to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually). For example, if an account maintained an annual balance of
$1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic
Withdrawal Plan free of charge. Any amount over that $120,000 would be assessed
a 1% contingent deferred sales charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this prospectus by telephone. In addition, if you
complete and file an Agreement as described under "How Do I Sell Shares? - By
Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this prospectus.
From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin account
and request duplicate confirmation or year-end statements and deposit slips. The
Fund code, which will be needed to access system information, is 153. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return, tax equivalent yield, taxable equivalent and current
distribution rate. They may also occasionally cite statistics to reflect the
Fund's volatility or risk.
Average annual total return figures, as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Fund may also furnish total
return quotations for other periods or based on investments at various sales
charge levels or at net asset value. For such purposes, total return equals the
total of all income and capital gain paid to shareholders, assuming reinvestment
of all distributions, plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments. It is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield for the Fund, which are calculated
according to a formula prescribed by the SEC (see "General Information" in the
SAI), are not indicative of the dividends or distributions which were or will be
paid to the Fund's shareholders. Dividends or distributions paid to shareholders
of the Fund are reflected in the current distribution rate or taxable equivalent
distribution rate, which may be quoted to you. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. A taxable
equivalent distribution rate demonstrates the taxable distribution rate
necessary to produce an after tax distribution rate equivalent to that of a fund
which invests in tax-exempt obligations. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as short-term
capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's performance may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series or
classes may be added in the future by the Board.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the 1940
Act. Voting rights are noncumulative, so that in any election of trustees the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees such
as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the trustees. Certain funds in the
Franklin Templeton Funds currently offer their shares in two classes, designated
"Class I" and "Class II." Because the Fund's sales charge structure and plan of
distribution are similar to those of Class I shares, shares of the Fund may be
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.
Offering price - The public offering price is equal to the net asset value per
share plus the 2.25% sales charge.
Proper Form (Purchases) - Generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - Financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
U.S. - United States.
FRANKLIN NEW YORK TAX-FREE TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
MAY 1, 1996
Contents Page
How Do the Funds Invest Their Assets?............ 2
Description of Municipal and Other Securities... 3
Insurance (Insured Fund Only).................... 6
Investment Restrictions.......................... 7
Officers and Trustees............................ 9
Investment Advisory and Other Services.......... 12
How Do the Funds Purchase
Securities For Their Portfolios? .............. 14
How Do I Buy and Sell Shares?.................... 14
How Are the Funds' Shares Valued?................ 17
Additional Information Regarding Taxation....... 18
The Trust's Underwriter.......................... 20
General Information.............................. 22
Financial Statements............................. 28
Appendices....................................... 28
Franklin New York Insured Tax-Free Income Fund (the "Insured Fund"), Franklin
New York Tax-Exempt Money Fund (the "Money Fund"), and Franklin New York
Intermediate-Term Tax-Free Income Fund (the "Intermediate-Term Fund") are
non-diversified series of the Franklin New York Tax-Free Trust (the "Trust"), an
open-end management investment company. The series may separately or
collectively be referred to hereafter as the "Fund," "Funds" or individually by
the policy included as part of its name. The Funds' investment objective is to
provide investors with as high a level of income exempt from federal and New
York State and New York City personal income taxes as is consistent with prudent
investment management, while seeking preservation of shareholders' capital. The
Money Fund also seeks liquidity in its investments.
The Insured Fund seeks to achieve its objective by investing in New York
municipal securities covered by insurance guaranteeing the scheduled payment of
principal and interest, in securities backed by the full faith and credit of the
United States ("U.S.") government, in municipal securities secured by such U.S.
government obligations and in short-term obligations of issuers with the highest
ratings from Moody's Investor Service ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch Investors Service ("Fitch"). All insured securities not insured
through the issuer will be insured by a qualified municipal bond insurer.
The Money Fund is a no-load money market fund offering investors a convenient
way to invest in a professionally managed portfolio of high quality, short-term
New York municipal securities. The Money Fund attempts to maintain a stable net
asset value of $1.00 per share and offers you the convenience of redemption
drafts (similar to checks) as one of the means of selling your shares.
The Intermediate-Term Fund seeks to achieve its objective by investing primarily
in a portfolio of investment grade obligations with a dollar-weighted average
portfolio maturity of more than three years but not more than ten years.
The Insured Fund offers two classes of shares: Franklin New York Insured
Tax-Free Income Fund - Class I ("Class I") and Franklin New York Insured
Tax-Free Income Fund - Class II ("Class II"). This multiclass structure allows
you to consider, among other features, the impact of sales charges and
distribution fees ("Rule 12b-1 fees") on your investment in the Insured Fund.
Separate prospectuses for the Funds, dated May 1, 1996, as may be amended from
time to time (the "Prospectus(es)"), provide the basic information you should
know before investing in a Fund and may be obtained without charge from the
Trust or the Trust's principal underwriter, Franklin/Templeton Distributors,
Inc. ("Distributors"), at the address or telephone number shown above.
This Statement of Additional Information ("SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectuses. This SAI is intended to provide you with additional information
regarding the activities and operations of the Trust and each Fund and should be
read in conjunction with the Funds' Prospectuses.
How Do the Funds Invest Their Assets?
As noted in the Prospectuses, each Fund seeks to provide investors with as high
a level of income exempt from federal income taxes and from the personal income
taxes of New York State and New York City as is consistent with prudent
investment management, while seeking the preservation of shareholders' capital.
The Money Fund also seeks liquidity in its investments. The Intermediate-Term
Fund seeks to accomplish its objective by investing primarily in a portfolio of
investment grade obligations with a dollar-weighted average portfolio maturity
of more than three years but not more than ten years.
As described in each Prospectus, under normal market conditions, each Fund will
attempt to invest 100% and, as a matter of fundamental policy, will invest at
least 80% of its net assets in securities that pay interest exempt from federal
income tax, including the alternative minimum tax. Under normal circumstances,
each Fund will invest at least 65% of its total assets in securities that pay
interest exempt from the personal income taxes of New York State and New York
City. Thus, it is possible, although not anticipated, that up to 20% of each
Fund's net assets could be invested in securities subject to federal tax,
including the alternative minimum tax and up to 35% of each Fund's total assets
could be in municipal securities from a state or municipality other than New
York.
Although each 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 only, when the investment manager believes that market conditions, such
as rising interest rates or other adverse factors, would cause serious erosion
of portfolio value, each Fund may invest more than 20%, and up to 100%, in
securities, the interest on which is subject to federal income tax, and each
Fund may invest more than 35%, and up to 100%, of its total assets in
instruments the interest on which is exempt from federal income taxes only. For
the Money Fund, temporary investments not in municipal securities will be
limited to U.S. government securities, commercial paper rated in the highest
grade by either Moody's, S&P or Fitch (Prime-1, A-1 or F-1 respectively), or in
obligations of U.S. banks with assets of $1 billion or more. See "Appendix B -
Description of Municipal Securities Ratings" at the end of this SAI for more
information about ratings.
As required by Rule 2a-7 under the 1940 Act, the Money Fund will limit its
investments to those U.S. dollar denominated instruments which the Board of
Trustees of the Trust (the "Board") determines present minimal credit risk and
which are, as required by the federal securities laws, rated in one of the two
highest rating categories (within which there may be sub-categories or
gradations indicating relative standing) as determined by nationally recognized
statistical rating agencies, or which are unrated and of comparable quality,
with remaining maturities of 397 calendar days or less. The Money Fund will
maintain a dollar weighted average maturity of the securities in its portfolio
of 90 days or less. The maturities of variable or floating rate demand
instruments held by the Money Fund will be deemed to be the longer of the demand
period or the period remaining until the next interest rate adjustment, although
the stated maturities may be in excess of one year. These procedures are not
fundamental policies of the Money Fund.
Generally, all of the instruments held by the Money Fund are offered on the
basis of a quoted yield to maturity, and the price of the security is adjusted
so that, relative to the stated rate of interest, it will return the quoted rate
to the purchaser. The maturities of these instruments held by the Money Fund at
the time of issuance will generally range between three months and one year.
Each Fund is non-diversified and thus not subject to any statutory restriction
under the 1940 Act with respect to the concentration of its assets in one or
relatively few issuers. This concentration may present greater risks than in the
case of a diversified fund. Each Fund, however, intends to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") and, therefore, will be restricted in that, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets must be represented by cash, government securities, and other
securities limited in respect of any one issuer to not more than 5% of the value
of the total assets of the Fund. In addition, at the close of each quarter of
its taxable year, not more than 25% of each Fund's total assets may be invested
in securities of one issuer, other than government securities. These limitations
are not fundamental policies and may be revised to the extent applicable federal
income tax requirements are revised.
Each Fund may invest 25% or more of its net assets in securities that are
related in such a way that an economic, business or political development or
change affecting one security would also affect the other securities, including,
for example, securities the interest upon which is paid from revenues of similar
type projects, or securities the issuers of which are located in the same
geographic area.
The investment objective and fundamental policies of each Fund, as set forth
above, may not be changed without the approval of a majority of the respective
Fund's outstanding shares.
Description of Municipal and Other Securities
The Prospectuses describe the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which each Fund may invest.
Tax Anticipation Notes 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 other kinds of revenue,
such as federal revenues available under the Federal Revenue Sharing Program.
They, also, 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, 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 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 that may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided further security in the form of a state's assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. These are in most cases revenue bonds and are
issued by or on behalf of public authorities to raise money to finance 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
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payments.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. During the
period between purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues to a Fund. To the extent that assets of a Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income; however, it is each Fund's intention to be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued securities may be sold prior to the settlement date, each Fund
intends to buy such securities with the purpose of actually acquiring them,
unless a sale appears desirable for investment reasons. At the time a Fund makes
the commitment to buy 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. Each Fund believes that its net asset value or income will not be
adversely affected by its purchase of municipal bonds on a when-issued basis.
Each Fund will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Callable Bonds. There are municipal bonds issued with provisions that prevent
them from being called, typically for periods of 5 to 10 years. 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 investment manager, each
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 dates, if the investment manager believes such
bonds are at their maximum premium potential. In pricing such bonds in each
Fund's portfolio, each callable bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of a Fund's callable bonds may
have an impact on such Fund's net asset value. In light of each Fund's pricing
policies and because each Fund follows certain amortization procedures required
by the Internal Revenue Service ("IRS"), a Fund is not expected to suffer any
material adverse impact related to the value at which a Fund has carried the
bonds in connection with calls of bonds purchased at a premium. Notwithstanding
such policies, however, the reinvestment of the proceeds of any called bond may
be in bonds that 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 each Fund's objective
will be achieved.
Escrow-Secured or Defeased Bonds are created when an issuer refunds in advance
of maturity (or pre-refunds) an outstanding bond issue that 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 that 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, Moody's or Fitch.
Stripped Municipal Securities. Municipal Securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Zero Coupon Securities. The Insured Fund's and the Intermediate-Term Fund's
investment in zero coupon and delayed interest bonds may cause such Funds to
recognize income and make distributions to shareholders prior to the receipt of
cash payments. Zero coupon securities make no periodic interest payments but
instead are sold at a deep discount from their face value. The buyer recognizes
a rate of return determined by the gradual appreciation of the security, which
is redeemed at face value on a specified maturity date.
Because zero coupon securities bear no interest, and compound semiannually at
the rate fixed at the time of issuance, the value of such securities is
generally more volatile than other fixed-income securities. Since zero coupon
bondholders do not receive interest payments, zeros fall more dramatically than
bonds paying interest on a current basis when interest rates rise. When interest
rates fall, zero coupon securities rise more rapidly in value, because the bonds
reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements, the Insured Fund
and the Intermediate-Term Fund may be required to dispose of portfolio
securities that they otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
Convertible and Step Coupon Bonds. The Insured Fund and the Intermediate-Term
Fund may invest a portion of their assets in convertible and step coupon bonds.
The convertible bonds that such Funds may buy are zero coupon securities until a
predetermined date, at which time they convert to a specified coupon security.
The coupon on step coupon bonds changes periodically during the life of the
security based upon predetermined dates chosen at the time of issuance and/or
the occurrence in the future of a specified event, such as a change in rating by
a nationally recognized statistical rating organization.
Variable or Floating Rate Demand Notes ("VRDNs"). These are tax-exempt
obligations that contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period (generally up to 30
days) prior to specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily up
to monthly, and are calculated to maintain the market value of the VRDN at
approximately its par value upon the adjustment date.
The Money Fund will buy variable or floating rate demand instruments in
accordance with procedures prescribed by the Board. These procedures have been
adopted to minimize credit risks. Any VRDN purchased by the Money Fund must be
of high quality, as determined by the Board, with respect to both its long-term
and short-term aspects, except that where credit support for the instrument is
provided even in the event of default on the underlying security, the Money Fund
may rely only on the high quality character of the short-term aspect of the
demand instrument, i.e., the demand feature. A VRDN that is unrated must have
high quality characteristics, similar to those that are rated, in accordance
with policies and guidelines determined by the Board. If the quality of any VRDN
falls below the high quality level required by the Board and the rules adopted
by the SEC, the Money Fund must dispose of the instrument within a reasonable
period of time by exercising the demand feature or by selling the VRDN in the
secondary market, whichever is believed by the investment manager to be in the
best interests of the Money Fund and its shareholders.
Certificates of Participation. Each Fund may also invest in municipal lease
obligations primarily through Certificates of Participation. Please see the
prospectuses for a discussion of these obligations.
U.S. Government Obligations that may be owned by a 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.
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.
Repurchase Agreements. The Money Fund may engage in repurchase transactions, in
which the Fund buys a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Money Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Money Fund might also incur disposition costs in liquidating the collateral.
The Money Fund, however, intends to enter into repurchase agreements only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security. The U.S. government security subject
to resale (the collateral) will be held pursuant to a written agreement and the
Fund's custodian will take title to, or actual delivery of, the security. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Money Fund invest in repurchase agreements
with a term of more than one year. The securities that are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The Money Fund may not enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 10% of the market value of the Fund's total assets would be invested in
such repurchase agreements.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, each Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Funds' custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. Each Fund may engage in security loan arrangements
with the primary objective of increasing such Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities loan agreement,
a Fund continues to be entitled to all dividends or interest on any loaned
securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
Income derived by a Fund from securities lending transactions, repurchase
transactions, and investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal and New York City and New
York State personal income tax purposes when distributed to you. Income derived
by a Fund from interest on direct obligations of the U.S. government will be
taxable for federal income tax purposes when distributed to you. If a Fund,
however, meets the requirements of New York State law and properly designates
such distributions, they will be excludable from income for New York State
personal income tax purposes.
There may, of course, be other types of municipal securities that become
available that are similar to the foregoing described municipal securities, in
which each Fund may also invest, to the extent such investments would be
consistent with the foregoing objectives and policies.
Timing of Securities Transactions
The Intermediate-Term Fund and the Insured Fund may buy or sell securities
without regard to the length of time the security has been held, and the
frequency of portfolio transactions (the turnover rate) will vary from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover, the execution costs for municipal bonds are substantially
less than for equivalent dollar values of equity securities. Portfolio turnover
rates for the Intermediate-Term Fund and the Insured Fund are in the Financial
Highlights table in their respective Prospectuses. Because the Money Fund buys
securities with maturities of less than 397 days, securities that are excluded
in making such a calculation, it does not have, nor is it expected to have, any
reportable turnover.
Insurance (Insured Fund Only)
Except for certain temporary short-term investments or U.S. government
guaranteed securities, the investment in municipal securities by the Insured
Fund is covered by insurance guaranteeing the scheduled payment of principal and
interest thereon. Depending on market conditions, and under current portfolio
insurance restrictions, it is expected that New York municipal securities will
comprise a major portion of the portfolio of the Insured Fund.
As described in its Prospectus, the Insured Fund will receive payments of
insurance for any installment of interest and principal due for payment but
which shall be unpaid by reason of nonpayment by the issuer. The term "due for
payment," in reference to the principal of a security, means its stated maturity
date or the date on which it shall have been called for mandatory sinking fund
redemption and does not refer to any earlier date on which payment is due by
reason of a call for redemption (other than by mandatory sinking fund
redemption), acceleration or other advancement of maturity; when referring to
interest on a security, the term means the stated date for payment of interest.
When, however, the interest on the security shall have been determined, as
provided in the underlying documentation relating to such security, to be
subject to federal income taxation, due for payment, when referring to the
principal of such security, also means the date on which it has been called for
mandatory redemption as a result of such determination of taxability; when
referring to interest on such security, the term means the accrued interest at
the rate provided in such documentation to the date on which it has been called
for such mandatory redemption, together with any applicable redemption premium.
The insurance feature insures the scheduled payment of interest and principal
and does not guarantee the market value of the insured municipal securities nor
the value of the shares of the Insured Fund.
As stated in the Insured Fund's Prospectus, each insured municipal security in
the Insured Fund's portfolio will be covered by either a "New Issue Insurance
Policy" obtained by the issuer of the security at the time of its original
issuance or a "Secondary Insurance Policy" or a "Portfolio Insurance Policy"
issued by a qualified municipal bond insurer.
Under the provisions of the Portfolio Insurance Policy, the insurer
unconditionally and irrevocably agrees to pay to the appointed trustee or its
successor and its agent (the "Trustee") that portion of the principal of and
interest on the securities that shall become due for payment but shall be unpaid
by reason of nonpayment by the issuer. The insurer will make such payments to
the Trustee on the date such principal or interest becomes due for payment or on
the business day next following the day on which the insurer shall have received
notice of nonpayment, whichever is later. The Trustee will disburse to the
Insured Fund the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment by the issuer, but only upon
receipt by the Trustee of (i) evidence of the Insured Fund's right to receive
payment of the principal or interest due for payment and (ii) evidence,
including any appropriate instruments of assignment, that all of the rights to
payment of such principal or interest due for payment shall thereupon vest in
the insurer. Upon such disbursement, the insurer shall become the owner of the
security, appurtenant coupon or right to payment of principal or interest on
such security and shall be fully subrogated to all of the Insured Fund's rights
thereunder, including the right to payment thereof.
The portfolio insurance of the Insured Fund may affect the value of the Insured
Fund's shares under certain circumstances. As discussed in the Insured Fund's
Prospectus, unless a Secondary Market Insurance Policy is purchased with respect
to the portfolio security, the Insured Fund intends to hold any defaulted
securities or securities for which there is a significant risk of default in its
portfolio until the default has been cured or the principal and interest are
paid by the issuer or the insurer. In such circumstances, the Board has
instructed the Manager to consider in its evaluation of these securities the
value of the insurance for the interest and principal payments, as well as the
market value of the portfolio securities, the market value of securities of
similar issuers whose securities carry similar interest rates, and the
discounted present value of the interest and principal payments to be received
from the insurance company. Absent any unusual or unforeseen circumstances as a
result of the Portfolio Insurance Policy, the Manager would likely recommend
that the Insured Fund value the defaulted securities, or securities for which
there is a significant risk of default, at the same price as securities of a
similar nature which are not in default. A defaulted security covered by a
Secondary Market Policy would be valued at market.
Bond insurers are often referred to as "monolines" in that they only write
financial guarantees, as opposed to "multiline" insurers who write several
different types of insurance policies, such as life, auto and home insurance,
and are exposed to many types of risk. Additionally, bond insurers are not
exposed to "run risk" (which occurs when too many policyholders rush to cash in
their policies), because they only guarantee payment when due. Also, in order to
maintain triple-A status by recognized national securities rating agencies
(which is required by the Insured Fund), the bond insurers invest their assets
mainly in high quality municipal and corporate bonds rated double-A or better
and U.S. government obligations.
Neither the Insured Fund nor its investment manager make any representations as
to the ability of any insurance company to meet its obligation to the Insured
Fund if called upon to do so.
Investment Restrictions
Each Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of that Fund. Under the Investment Company Act of
1940, as amended (the "1940 Act"), a "vote of a majority of the outstanding
voting securities" of a Fund means the affirmative vote of the lesser of (i)
more than 50% of the outstanding shares of the Fund or (ii) 67% or more of the
shares of the Fund present at a shareholder meeting if more than 50% of the
outstanding shares of the Trust or such Fund are represented at the meeting in
person or by proxy. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets thereof) for temporary or emergency purposes may be made
from banks in any amount up to 5% of the total asset value. Secured temporary
borrowings may take the form of a reverse repurchase agreement, pursuant to
which each Fund would sell portfolio securities for cash and simultaneously
agree to repurchase them at a specified date for the same amount of cash plus an
interest component.
2. Buy any securities on margin or sell any securities short, except that it
may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of debt securities which are
customarily purchased by institutional investors, including the municipal
securities described above, 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 a Fund from loaning portfolio securities to
broker-dealers or other institutional investors if at least 102% cash collateral
is pledged and maintained by the borrower; provided such portfolio security
loans may not be made if, as a result, the aggregate of such loans exceeds 10%
of the value of a 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 a
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 securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices, and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
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, except that each Fund may purchase, hold,
and dispose of puts on municipal securities in accordance with its investment
policies.
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 that the
Intermediate-Term Fund may invest in shares of one or more money market funds
managed by Franklin Advisers, Inc., to the extent permitted by exemptions
granted under the 1940 Act, and except to the extent the Insured 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 Insured 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. Invest more than 10% of its assets in securities, in the case of the Money
Fund, with legal or contractual restrictions on resale.
12. Invest more than 25% of its 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.
In addition to these fundamental policies, it is the policy of the Money Fund
not to buy securities of any issuer having a record, together with predecessors,
of less than three years' continuous operation if, immediately after such
purchase, more than 10% of the Money Fund's assets taken at market value would
be invested in such securities; except that the Money Fund may invest up to 20%
of its assets in the securities of municipal issuers that have been in
continuous operation for less than three years. Pursuant to an undertaking given
to the Ohio State Securities Board, the Money Fund and the Intermediate-Term
Fund will limit investments in securities of issuers, together with
predecessors, of less than three years' continuous operation to 15% of a Fund's
total assets. It is not the policy of the Intermediate-Term Fund to invest in
real estate limited partnerships or in interests (other than publicly traded
securities) in oil, gas, or other mineral leases, exploration or development.
If a percentage restriction contained herein is adhered to at the time of
investment, a later increase or decrease in the percentage resulting from a
change in value of portfolio securities or the amount of net assets will not be
considered a violation of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Trust. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Trust, as defined in the 1940 Act, are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 0796945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
*William J. Lippman (71)
One Parker Plaza
Fort Lee, NJ 07024
Trustee
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of six of the investment companies in the Franklin
Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (51)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, 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.
Thomas J. Kenny (33)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Richard C. Stoker (58)
11615 Spring Ridge Rd.
Potomac, Maryland 20854
Vice President
Senior Vice President, Franklin Templeton Distributors, Inc.; Vice President,
Franklin Management, Inc.; and officer of five of the funds in the Franklin
Group of Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and the investment manager. Trustees not
affiliated with the investment manager ("nonaffiliated trustees") are currently
paid fees of $50 per month plus $50 per meeting attended. As indicated above,
certain of the Trust's nonaffiliated trustees also serve as directors, trustees
or managing general partners of other investment companies in the Franklin Group
of Funds" and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated trustees by the Trust and by
other funds in the Franklin Templeton Group of Funds.
Total Number of Boards
Compensation in the Franklin Aggregate from Franklin
Templeton Group Compensation Templeton of Funds on
Name from Trust* Group of Funds* Which Each Serves**
Frank H. Abbott, III $1,200 $162,420 31
Harris J. Ashton.... $1,200 $327,925 56
S. Joseph Fortunato. $1,200 $344,745 58
David Garbellano.... $1,200 $146,100 30
Frank W.T. LaHaye... $1,200 $143,200 26
Gordon Macklin...... $1,200 $321,525 53
*For the year ended December 31, 1995.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of approximately 162 U.S. based
funds or series.
Generally nonaffiliated trustees are reimbursed for expenses incurred in
connection with attending board meetings, and paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or trustee received any other compensation
directly from the Trust. Certain officers or trustees who are shareholders of
Franklin Resources, Inc. ("Resources") may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
As of February 12, 1996, the officers and trustees, as a group, owned of record
and beneficially approximately 8,545.544 shares, or less than 1% of the total
outstanding shares of the Money Fund. The trustees and officers did not own of
record or beneficially any outstanding shares of the Insured Fund or the
Intermediate-Term Fund. Many of the Trust's trustees 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.
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 that are involved in
investment management and shareholder services.
Pursuant to separate management agreements, the Manager provides investment
research and portfolio management services, including the selection of
securities for each Fund to purchase, hold or sell and the selection of brokers
through whom each Fund's portfolio transactions are executed. The Manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The Manager's activities are subject to the
review and supervision of the Board to whom the Manager renders periodic reports
of each Fund's investment activities. Under the terms of the management
agreements, the Manager provides office space and office furnishings, facilities
and equipment required for managing the business affairs of the Trust; 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 Trust. Please see the Statement of
Operations in the financial statements included in the Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 1995.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Funds. Similarly, with respect to the Funds, the
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Funds or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Funds' Code of Ethics.
Pursuant to management agreements with the Intermediate-Term and Insured Funds,
each 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 average
monthly net assets of the Fund; 1/24 of 1% (approximately 1/2 of 1% per year) of
average monthly net assets of the Fund in excess of $100 million up to $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million. Each class of the
Insured Fund will pay its share of the management fee, as determined by the
proportion of the Insured Fund that each class represents. Pursuant to its
management agreement with the Manager, the Money Fund pays a daily fee (payable
at the request of the Manager) computed at the rate of 1/584 of 1%
(approximately 5/8 of 1% per year) of the average daily net assets of the Fund
for the first $100 million; plus 1/730 of 1% (approximately 1/2 of 1% per year)
of average daily net assets over $100 million up to $250 million; and 1/811 of
1% (approximately 45/100 of 1% per year) of average daily net assets in excess
of $250 million.
The management agreements specify 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 a Fund as prescribed by any state in which a 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 a
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 a Fund, 2.0% of the next
$70 million of average net assets of a Fund, and 1.5% of average net assets of a
Fund in excess of $100 million. Expense reductions have not been necessary based
on state requirements.
The Manager has agreed in advance to waive a portion of its management fees and
make certain payments to reduce expenses. The tables below set forth the
management fees before any advance waiver and management fees paid by each Fund
for the fiscal years ended December 31, 1993, 1994 and 1995.
Fiscal Year Ended December 31, 1995:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund $ 385,243 $ 227,525
Insured Fund Class I...... $1,345,380 $1,183,588
Insured Fund Class II $ 1,707 $ 1,502
Intermediate-Term Fund $ 247,415 $ 51,949
Fiscal Year Ended December 31, 1994:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund................ $ 369,023 $ 171,416
Insured Fund.............. $1,349,257 $ 992,613
Intermediate-Term Fund........$ 234,273 -0-
Fiscal Year Ended December 31, 1993:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund $ 319,118 $ 142,460
Insured Fund.............. $1,185,510 $ 868,888
Intermediate-Term Fund $ 106,935 -0-
The management agreement for the Money Fund is in effect until February 28, 1997
and the management agreements for the Intermediate-Term and Insured Funds are in
effect until March 31, 1997. Thereafter, they may continue in effect for
successive annual periods, provided such continuance is specifically approved at
least annually by a vote of the Board or by a vote of the holders of a majority
of the respective Fund's outstanding voting securities, and in either event by a
majority vote of the Trust's trustees who are not parties to the management
agreements or interested persons of any such party (other than as trustees of
the Trust), cast in person at a meeting called for that purpose. The management
agreements as to the Insured Fund and the Intermediate-Term Fund may be
terminated without penalty at any time by the Board or by the Manager on 30
days' written notice and, as to the Money Fund, on 60 days' written notice, and
will automatically terminate in the event of their assignment, as defined in the
1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"), a wholly-owned
subsidiary of Resources, is the shareholder servicing agent for the Trust and
acts as the Trust's transfer agent and dividend-paying agent. Investor Services
is compensated on the basis of a fixed fee per account.
Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New
York 10286, acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle, Delaware
19720, acts as custodian in connection with transfer services through bank
automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended December 31,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
for the fiscal year ended December 31, 1995.
How Do the Funds Purchase Securities For Their Portfolios?
Since most purchases by the Funds are principal transactions at net prices, the
Funds incur little or no brokerage costs. Each 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 prices. As a general rule, the
Funds do not purchase bonds in underwritings where they are given no choice, or
only limited choice, in the designation of dealers to receive the commission.
Each Fund seeks to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services rendered by such
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by the Manager from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. Provided that
the Trust's officers are satisfied that the best execution is obtained, the sale
of a Fund's shares may also be considered as a factor in the selection of
broker-dealers to execute a Fund's portfolio transactions.
If purchases or sales of securities of a 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 a 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 a Fund.
During the past three fiscal years ended December 31, the Funds paid no
brokerage commissions.
As of December 31, 1995, the Funds did not own securities of their regular
broker-dealers.
How Do I Buy and Sell Shares?
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Trust must be denominated in U.S. dollars. The Trust
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) honor
the transaction or make adjustments to a your account for the transaction as of
a date and with a foreign currency exchange factor determined by the drawee
bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the funds into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of a Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to a Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at the respective Fund's net asset value until new instructions are
received.
The Trust may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Trust is otherwise unable to locate you
or verify your current mailing address. These costs may include a percentage of
the account when a search company charges a percentage fee in exchange for its
location services.
Under agreements with certain banks in Taiwan, Republic of China, the Insured
Fund's and the Intermediate-Term 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 one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Shares of the Intermediate-Term Fund and Class I shares of the Insured 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 either Fund may be offered with the
following schedule of sales charges:
Sales
Size of Purchase - in U.S. dollars Charge
Under $30,000................................ 3%
$30,000 but less than $100,000............... 2%
$100,000 but less than $400,000.............. 1%
$400,000 or more............................. 0%
Purchases and Redemptions through Securities Dealers
Orders for the purchase of shares of the Insured Fund and the Intermediate-Term
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 respective 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 respective 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 Funds. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to you resulting from the failure to do so must be settled between you
and the securities dealer.
Effectiveness of Purchase Orders (Money Fund)
Payments transmitted by wire and received by the custodian and reported by the
custodian to the Money Fund prior to 3:00 p.m. Pacific time on any business day
are normally effective on the same day as received. Wire payments received or
reported by the custodian to the Money Fund after that time will normally be
effective on the next business day. Payments transmitted by check or other
negotiable bank draft will normally be effective within two business days for
checks drawn on a member bank of the Federal Reserve System and longer for most
other checks.
Other Payments to Securities Dealers
As discussed in the Prospectuses for the Intermediate-Term Fund and the Insured
Fund under "How Do I Buy Shares? - General," either Distributors or one of its
affiliates may make payments, out of its own resources, to securities dealers
who initiate and are responsible for purchases of Class I shares made at net
asset value by certain trust companies and trust departments of banks, as
described below. Distributors may make these payments in the form of contingent
advance payments, which may be recovered from the securities dealer or set off
against other payments due to the securities dealer in the event shares are
redeemed within 12 months of the calendar month of purchase. Other conditions
may apply. All terms and conditions may be imposed by an agreement between
Distributors, or one of its affiliates, and the securities dealer.
With respect to purchases of Class I shares 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 (Intermediate-Term Fund and Class I Shares of the Insured Fund)
You may qualify for a reduced sales charge on the purchase of shares of the
Intermediate-Term Fund and Class I shares of the Insured Fund, as described in
their Prospectuses. At any time within 90 days after the first investment which
you want to qualify for a reduced sales charge, you may file with the respective
Fund a signed Shareholder Application with the Letter of Intent (the "Letter")
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based upon purchases in more than one of the
Franklin Templeton Funds will be effective only after notification to
Distributors that the investment qualifies for a discount. Your holdings in the
Franklin Templeton Funds, including Class II shares, acquired more than 90 days
before the Letter is filed, will be counted towards completion of the Letter but
will not be entitled to a retroactive downward adjustment in the sales charge.
Any redemptions you make during the 13-month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
Letter have been completed. If the Letter is not completed within the 13-month
period, there will be an upward adjustment of the sales charge, depending upon
the amount actually purchased (less redemptions) during the period. If you
execute a Letter prior to a change in the sales charge structure for the Insured
Fund or the Intermediate-Term Fund, you will be entitled to complete the Letter
at the lower of the new sales charge structure or the sales charge structure in
effect at the time the Letter was filed.
As mentioned in the Prospectuses of the Insured Fund and the Intermediate-Term
Fund, five percent (5%) of the amount of the total intended purchase will be
reserved in Class I shares of the respective Fund registered in your name. If
the total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in your name or
delivered to you or as you direct. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the securities dealer through whom purchases were made
pursuant to the Letter (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
Redemptions in Kind
Each Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the applicable
Fund's net assets at the beginning of the 90-day period. This commitment is
irrevocable without the prior approval of the Securities and Exchange Commission
("SEC") . In the case of redemption requests in excess of these amounts, the
trustees reserve the right to make payments in whole or in part in securities or
other assets of the Fund, in case of an emergency, or if the payment of such a
redemption in cash would be detrimental to the existing shareholders of the
Fund. In such circumstances, the securities distributed would be valued at the
price used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Funds do not intend to redeem illiquid
securities in kind. Should it happen, however, you may not be able to recover
your investment in a timely manner.
Redemptions by the Funds
Due to the relatively high cost of handling small investments, each Fund
reserves the right to involuntarily redeem your shares at net asset value if
your account has a value of less than one-half of your initial required minimum
investment, but only where the value of your account has been reduced by the
shareholder's prior voluntary redemption of shares. Until further notice, it is
the present policy of each Fund not to exercise this right if your account has a
value of $50 or more with respect to the Intermediate-Term Fund and the Insured
Fund and $250 or more with respect to the Money Fund. In any event, before a
Fund redeems your shares and sends you the proceeds, it will notify you that the
value of the shares in your account is less than the minimum amount and allow
you 30 days to make an additional investment in an amount which will increase
the value of your account to at least $100 in the case of the Intermediate-Term
Fund and the Insured Fund and $500 in the case of the Money Fund.
Reports to Shareholders
The Trust sends annual and semiannual reports regarding each Fund's performance
and portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of each Fund. The
cost of these services is not borne by the Funds.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Trust on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Trust normally
pays Investor Services. These financial institutions may also charge a fee for
their services directly to their clients.
Investor Services may charge separate fees to shareholders of the Money Fund, to
be negotiated directly with such shareholders, for providing special services in
connection with their accounts, such as processing a large number of checks each
month. Fees for special services will not increase the expenses borne by the
Money Fund.
As noted in the Money Fund's Prospectus, special procedures have been designed
for banks and other institutions wishing to open multiple accounts in the Money
Fund. An institution may open a single master account by filing one application
form with the Money Fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened at the time the master
account is filed by listing them or instructions may be provided to the Fund at
a later date. These sub-accounts may be established by the institution with
registration either by name or number. The investment minimums applicable to the
Money Fund are applicable to each sub-account. The Trust will provide each
institution with a written confirmation for each transaction in a sub-account
and arrangements may be made at no additional charge for the transmittal of
duplicate confirmations to the beneficial owner of the sub-account.
Further, the Trust will provide to each institution, on a quarterly basis or
more frequently if requested, a statement setting forth each sub-account's share
balance, income earned for the period, income earned for the year to date, and
total current market value.
How Are the Funds' Shares Valued?
As noted in the Prospectuses, each Fund and each class of the Insured Fund
calculates the net asset value as of the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time for the Intermediate-Term Fund and each class
of the Insured Fund and 3:00 p.m. Pacific time for the Money Fund) each day that
the Exchange is open for trading. As of the date of this SAI, the Trust is
informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of a Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of each Fund's shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the net asset value
of each class or Fund. If events materially affecting the values of these
securities occur during such period, then the securities will be valued at their
fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of trustees, the
Insured and the Intermediate Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
The valuation of the portfolio securities of the Money Fund (including any
securities held in a separate account maintained for when-issued securities) is
based upon their amortized cost, which does not take into account unrealized
capital gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in calculation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Fund would receive if it sold the
instrument. During periods of declining interest rates, the daily yield on
shares of the Money Fund computed as described above may tend to be higher than
a like computation made by a fund with identical investments utilizing a method
of valuation based upon market prices and estimates of market prices for all of
its portfolio instruments. Thus, if the use of amortized cost by the Money Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Fund would be able to obtain a somewhat higher yield than
would result from investment in a fund utilizing solely market values, and
existing investors in the Money Fund would receive less investment income. The
opposite would apply in a period of rising interest rates.
The Money Fund's use of amortized cost, which facilitates the maintenance of the
Money Fund's per share net asset value of $1.00, is permitted by a rule adopted
by the SEC. Pursuant to this rule, the Money Fund must adhere to certain
conditions. The Money Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, only purchase instruments having remaining
maturities of 397 calendar days or less, and invest only in those U.S.
dollar-denominated instruments that the Board determines present minimal credit
risks and which are, as required by the federal securities laws, rated in one of
the two highest rating categories as determined by nationally recognized
statistical rating agencies, instruments deemed comparable in quality to such
rated instruments, or instruments the issuers of which, with respect to an
outstanding issue of short-term debt that is comparable in priority and
protection, have received a rating within the two highest categories of a
nationally recognized statistical rating agencies. As discussed in the Money
Fund's Prospectus, securities subject to floating or variable interest rates
with demand features in compliance with applicable rules of the SEC may have
stated maturities in excess of one year.
The Board has agreed to establish procedures designed to stabilize, to the
extent reasonably possible, the Money Fund's price per share, as computed for
the purpose of sales and redemptions at $1.00. Such procedures will include
review of the Money Fund's holdings by the Board, at such intervals as it may
deem appropriate, to determine whether the Money Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share
based on amortized cost. The extent of any deviation will be examined by the
trustees. If such deviation exceeds 1/2 of 1%, the trustees will promptly
consider what action, if any, will be initiated. In the event the trustees
determine that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, they will take such
corrective action as they regard as necessary and appropriate, which may include
the sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends,
redemptions of shares in kind, or establishing a net asset value per share by
using available market quotations.
Additional Information Regarding Distributions and Taxation
Distributions
Distributions and distribution adjustments resulting from realized gains and
losses on the sale of portfolio securities of the Money Fund or from unrealized
appreciation or depreciation in the value of such portfolio securities are
required to maintain a $1.00 net asset value and may result in under or over
distributions of investment company taxable income.
If you, as a shareholder of the Money Fund, withdrew the entire amount in your
account at any time during the month, all dividends accrued with respect to your
account during the month to the time of withdrawal would be paid in the same
manner and at the same time as the proceeds of withdrawal. You will receive a
monthly summary of your account, including information as to dividends
reinvested or paid.
The Board reserves the right to revise the Money Fund's dividend policy or
postpone the payment of dividends, if warranted in its judgment, due to unusual
circumstances such as a large expense, loss or unexpected fluctuation in net
assets.
Taxation
As stated in the Prospectuses, each Fund has elected to be treated as a
regulated investment company under Subchapter M of the Code. The trustees
reserve the right not to maintain the qualification of a Fund as a regulated
investment company if they determine such course of action to be beneficial to
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, 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 you by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Funds and received by you on December 31 of the
calendar year in which they are declared. Each Fund intends as a matter of
policy to declare and pay such dividends, if any, in December to avoid the
imposition of this tax, but does not guarantee that its distributions will be
sufficient to avoid any or all federal excise taxes.
The Money Fund may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Because the Money Fund's
portfolio under normal circumstances is composed of short-term securities,
however, the Fund does not expect to realize any long-term capital gains or
losses. Distributions by each Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital loss carryovers) may
generally be made twice each year. One distribution may be made in December to
reflect the net short-term and net long-term capital gains realized by a Fund as
of October 31 of such year. Any net short-term and net long-term capital gains
realized by a Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to you. Each Fund may make only one distribution
derived from net short-term and net long-term capital gains in any year or
adjust the timing of its distributions for operational or other reasons.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation, gain
or loss will be recognized in an amount equal to the difference between your
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If such shares are a capital asset in your hands, gain or
loss will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Funds are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in buying shares of a Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss upon the
sale of such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the Franklin Templeton Group of Funds and a sales charge that
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. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of fund shares.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period and will be disallowed to the extent of exempt-interest
dividends paid with respect to such shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by 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 any
of the Funds to invest in such obligations, each Fund is authorized to so invest
for temporary or defensive purposes. To the extent that such investments are
made, each Fund will provide you with the percentage of any dividends paid which
may qualify for such tax-free treatment at the end of each calendar year. You
should consult with your own tax advisor with respect to the application of your
state and local laws to these distributions and on the application of other
state and local laws on distributions and redemption proceeds received from a
Fund.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult with your tax
advisor before buying shares of a Fund.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Funds and
the application of foreign tax laws to these distributions.
The Trust's Underwriter
Pursuant to an underwriting agreement in effect until February 28, 1997 (Money
Fund) and March 31, 1997 (Intermediate-Term Fund and Insured Fund), Distributors
acts as principal underwriter in a continuous public offering for shares of the
Funds, including both classes of shares of the Insured Fund. The underwriting
agreements will continue in effect for successive annual periods provided that
their continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of each Fund's outstanding
voting securities, and in either event by a majority vote of the trustees who
are not parties to the underwriting agreements or interested persons of any such
party (other than as trustees of the Trust), cast in person at a meeting called
for that purpose. The underwriting agreements terminate automatically in the
event of their assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of distributing the Funds' shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Intermediate-Term Fund's shares and the
Class I shares of the Insured Fund, aggregate underwriting commissions received
by Distributors and the amounts retained were as follows:
Fiscal year ended December 31, 1995
Total
Commissions Amount
Fund Received Retained
Insured Fund.................. $871,088 $55,389
Intermediate-Term Fund........ $137,315 $18,658
Fiscal Year ended December 31, 1994
Total
Commissions Amount
Fund Received Retained
Insured Fund.................. $1,248,174 $56,758
Intermediate-Term Fund........ $ 206,123 $25,515
Fiscal Year ended December 31, 1993
Total
Commissions Amount
Fund Received Retained
Insured Fund.................. $3,782,172 $81,946
Intermediate-Term Fund........ $ 406,861 $41,280
Dealers received $10 in connection with redemptions or repurchases of shares for
the Insured Fund for the year ended December 31, 1995. Distributors may be
entitled to reimbursement under the distribution plans of the Intermediate-Term
Fund and each class of the Insured Fund, as discussed below. Except as noted,
Distributors received no other compensation for acting as underwriter of the
Funds' shares.
Distribution Plans (Intermediate-Term Fund and Insured Fund)
Each class of the Insured Fund has adopted a distribution plan pursuant to Rule
12b-1 under the 1940 Act (the "Class I Plan" and "Class II Plan," respectively).
The Intermediate-Term Fund has also adopted a distribution plan pursuant to Rule
12b-1 (the "Intermediate-Term Plan"). The distribution plans for each Fund and
class may be collectively referred to as the "Plans".
Under the Class I Plan for the Insured Fund and the Intermediate-Term Plan, each
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
its shares.
In implementing the Class I Plan for the Insured Fund, the Board has 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 Insured Fund that were acquired by investors on or
after May 1, 1994, the effective date of the plan ("New Assets"), and (ii) the
amount obtained by multiplying 0.05% by the average daily net assets represented
by Class I shares of such Funds that were acquired before May 1, 1994 ("Old
Assets"). Such fees will be paid to the current securities dealer of record on
the account. In addition, until such time as the maximum payment of 0.10% is
reached on a yearly basis, up to an additional 0.02% 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 of the Insured
Fund, regardless of when they purchased their shares, will bear Rule 12b-1
expenses at the same rate. The initial rate will be at least 0.07% (0.05% plus
0.02%) of such Fund's or class' average daily net assets and, as Class I shares
of the Insured Fund shares are sold on or after May 1, 1994, will increase over
time. Thus, Class I shares of the Insured Fund purchased on or after May 1, 1994
increases in relation to outstanding Class I shares, the expenses attributable
to payments under the Class I 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 Plan permits the
Trust's trustees to allow the Insured Fund to pay a full 0.10% on all assets at
any time. The approval of the Board would be required to change the calculation
of the payments to be made under the Class I Plan.
Pursuant to the Intermediate-Term Plan and the Class I Plan, Distributors or
others will be entitled to be reimbursed each quarter (up to the maximum stated
above) for actual expenses incurred in the distribution and promotion of the
Intermediate-Term Fund's shares and the Class I shares of the Insured Fund,
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 such Fund's or class' shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Intermediate-Term Fund or the Insured
Fund, Distributors or its affiliates.
The Class I Plan and the Intermediate-Term Plan do not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
The Class II Plan. Under the Class II Plan, the Insured Fund pays Distributors
up to 0.50% per annum of the average daily net assets of Class II, payable
quarterly, for distribution and related expenses. These fees may be used to
compensate Distributors or others for providing distribution and related
services and bearing certain Class II expenses. All expenses of distribution and
marketing over this amount will be borne by Distributors or others who have
incurred them without reimbursement by the Insured Fund. Under the Class II
Plan, the Insured Fund also pays an additional 0.15% per annum of the average
daily net assets of Class II, payable quarterly, as a servicing fee. This fee
will be used to pay dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Insured Fund on behalf of customers; and
similar activities related to furnishing personal services and maintaining
shareholder accounts. At the time of investment, Distributors may pay the
securities dealer a commission of up to 1% of the amount invested out of its own
resources.
In General. In addition to the payments that Distributors or others are entitled
to under the Plans, each Plan also provides that to the extent the
Intermediate-Term Fund or the Insured Fund, the Manager or Distributors or other
parties on behalf of such Funds, the Manager or Distributors make payments that
are deemed to be for the financing of any activity primarily intended to result
in the sale of shares of such Funds, including shares of each class of the
Insured 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. The terms and
provisions of the Plans relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plans, plus any other payments deemed to be made pursuant to the
Plans, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing such services you would be
permitted to remain a shareholder of the Intermediate-Term Fund and the Insured
Fund and alternate means for continuing the servicing would be sought. In such
an event, changes in the services provided might occur and you might no longer
be able to avail yourself of any automatic investment or other services then
being provided by the bank. It is not expected that you would suffer any adverse
financial consequences as a result of any of these changes.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through March 31, 1997 and renewable annually by a vote
of the Board, including a majority vote of the trustees who are non-interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plans, cast in person at a meeting called for that purpose.
It is also required that the selection and nomination of such trustees be done
by the non-interested trustees. The Plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the Manager or, with
respect to the Intermediate-Term Fund, the underwriting agreement with
Distributors, or by vote of a majority of the respective Fund's and class'
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the respective Fund's and class' outstanding shares, and all material
amendments to the Plans or any related agreements shall be approved by a vote of
the non-interested trustees, cast in person at a meeting called for the purpose
of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
For the fiscal year ended December 31, 1995, Distributors had eligible
expenditures of $254,812, $6,878 and $35,980 for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class I and Class II
Plans and the Intermediate-Term Plan, respectively. As a result, the respective
Funds paid Distributors $184,647, $1,362 and $35,980 under the Class I, Class II
and the Intermediate-Term Plans, respectively.
General Information
Performance
As noted in the Prospectuses, each Fund and each class of the Insured Fund may
from time to time quote various performance figures to illustrate past
performance and may occasionally cite statistics to reflect volatility or risk.
INTERMEDIATE-TERM AND INSURED FUNDS
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
Fund or 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 Fund or class are based on the standardized
methods of computing performance mandated by the SEC. An explanation of those
and other methods used by the Intermediate-Term Fund and the classes of the
Insured Fund 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, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
in the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
The average annual compounded rates of return for the Intermediate-Term Fund and
Class I of the Insured Fund for the indicated periods ended on December 31,
1995, were as follows:
One Three From
Fund Name Year Years Inception
Insured Fund -
Class I................ 13.43% 5.92% 5.48%
Intermediate-Term
Fund................... 11.75% 5.25% 7.33%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof).
As discussed in their Prospectuses, the Intermediate-Term Fund and each class of
the Insured Fund may quote total rates of return in addition to the average
annual total return. These quotations are computed in the same manner as a
Fund's average annual compounded rates, except they will be based on each Fund's
or class' actual return for a specified period rather than on the average return
over one-, five- and ten-year periods. The total rates of return for the
Intermediate-Term Fund and Class I and Class II of the Insured Fund for the
indicated periods ended on December 31, 1995, were as follows:
One Three From
Fund Name Year Years Inception
Insured Fund -
Class I................ 13.43% 18.84% 39.20%
Insured Fund -
Class II............... -- -- 6.84%
Intermediate-Term
Fund................... 11.75% 16.58% 19.08%
Current Yield
The current yield for the Intermediate-Term Fund and each class of the Insured
Fund reflects the income per share earned by the Fund's portfolio investments
and is determined by dividing the net investment income per share of each Fund
or class earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses accrued
for the period include any fees charged to all shareholders of a Fund or class
during the base period. The yield for the Intermediate-Term Fund and Class I and
Class II of the Insured Fund for the 30-day period ended on December 31, 1995,
was 4.75%, 4.54% and 4.12%, respectively.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Tax Equivalent Yield
The Intermediate-Term Fund and each class of the Insured Fund may also quote a
tax equivalent yield that demonstrates the taxable yield necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. Tax equivalent yield is computed by dividing the portion of a
Fund's or class' yield (computed as indicated above) that is tax-exempt by one
minus the highest applicable combined federal, New York State and New York City
income tax rate (and adding the product to the portion of a Fund's or class'
yield that is not tax-exempt, if any). The tax equivalent yield for Class I and
Class II shares of the Insured Fund and the Intermediate-Term Fund for the
30-day period ended on December 31, 1995, was 8.55%, 8.95% and 7.72%,
respectively.
As of the date of this SAI, the federal income tax rate and the combined New
York state and local income tax rate upon which each Fund's tax equivalent yield
quotations are based were 39.60% and 11.59%, respectively. From time to time, as
any changes to the rates become effective, tax equivalent yield quotations
advertised by a Fund or class will be updated to reflect such changes. The Funds
expect updates may be necessary as tax rates are changed by federal, state and
local governments. The advantage of tax-free investments, such as the Funds,
will be enhanced by any tax rate increases. Therefore, the details of specific
tax increases may be used in sales material for the Funds.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders of a Fund or a class. Amounts paid to shareholders
are reflected in the quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by dividing the
total amount of dividends per share paid by a Fund or class during the past 12
months by a current maximum offering price. A taxable equivalent distribution
rate demonstrates the taxable distribution rate equivalent to the current
distribution rate of a Fund or a class (calculated as indicated above). The
advertised taxable equivalent distribution rate will reflect the most current
federal and New York State and New York City tax rates available to a Fund.
Under certain circumstances, such as when there has been a change in the amount
of dividend payout or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid over the period such policies were
in effect, rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than interest, such
as short-term capital gains and is calculated over a different period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
For investors who are permitted to purchase shares of the Intermediate-Term Fund
or the Insured Fund at net asset value, sales literature pertaining such Fund or
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.
A Fund may include in its advertising or sales material information relating to
investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in the Insured Fund and the
Intermediate-Term Fund may satisfy your investment objective, advertisements and
other materials regarding such Funds may discuss certain measures of performance
of each Fund or class as reported by various financial publications. Materials
may also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. Such comparisons may include, but are
not limited to, the following examples:
a) Merrill Lynch New York Municipal Bond Index - based upon yields from revenue
and general obligation bonds weighted in accordance with their respective
importance to the New York municipal market.
b) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
c) Bond Buyer's 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
d) Bond Buyer's 40-Bond Index - an index of municipal bond yields based upon
yields of 40 revenue bonds maturing in 30 years.
e) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
f) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
g) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
h) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg, L.P.
i) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
From time to time, advertisements or information for a 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 performance of a Fund or a
class to the return on certificates of deposit or other investments. You should
be aware, however, that an investment in a 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 a 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 a 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 each Fund is not insured by any federal, state or private entity.
MONEY FUND
Current Yield
Current yield reflects the interest income per share earned by the Fund's
portfolio investments and is computed by determining the net change, excluding
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then annualizing the result by multiplying
the base period return by (365/7).
The yield for the Money Fund for the seven-day period ended on December 31,
1995, was 3.79%.
Effective Yield
Effective yield is computed in the same manner, except that the annualization of
the return for the seven-day period reflects the results of compounding by
adding one to the base period return, raising the sum to a power equal to 365
divided by seven, and subtracting one from the result.
Effective yield for the Money Fund for the seven-day period ended on December
31, 1995, was 3.86%.
This figure was obtained using the SEC formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
Tax Equivalent Yield
The Money Fund may also quote a tax equivalent yield and tax equivalent
effective yield which demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. These yields are computed by dividing the portion of the Money
Fund's yield (computed as indicated above) that is tax-exempt by one minus the
highest applicable combined federal and state income tax rate (and adding the
product to the portion of the Money Fund's yield that is not tax-exempt, if
any). The tax equivalent yield based on the current yield of the Money Fund for
the seven-day period ended on December 31, 1995, was 7.14%. The tax equivalent
effective yield based on the effective yield of the Money Fund for the seven-day
period ended on December 31, 1995, was 7.23%. The advertised tax-equivalent
yield will reflect the most current federal and New York City and New York State
tax rates available to the Money Fund.
The tax rate discussion under "Tax Equivalent Yield" with respect to the Insured
Fund and the Intermediate-Term Fund applies as well to advertisements of tax
equivalent yield by the Money Fund.
Comparisons
To help you better evaluate how an investment in the Money Fund may satisfy your
investment objective, advertisements and other materials regarding the Money
Fund may discuss certain measures of Fund 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) IBC/Donoghue's Money Fund Report(R) - Industry averages for seven-day
annualized and compounded yields of taxable, tax-free and government money
funds.
b) Bank Rate Monitor - A weekly publication which reports various bank
investments such as CD rates, average savings account rates and average loan
rates.
c) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis and Lipper Mutual Fund Yield Survey - 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.
d) Salomon Brothers Bond Market Roundup - A weekly publication which reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and reserve
aggregates.
e) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
f) Standard & Poor's Bond Indices - measures yield and price of corporate,
municipal, and government bonds.
g) Financial Publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, and Money magazine.
h) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
i) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price, and total return for Treasury, Agency,
Corporate, and Mortgage bonds.
j) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for municipal bonds.
Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. You should be aware,
however, that an investment in the Fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a 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.
General
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Money Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of such averages may not
be identical to the formula used by the Money Fund to calculate its figures. In
addition, there can be no assurance that the Money Fund will continue its
performance as compared to such other averages.
Other Features and Benefits
ALL FUNDS
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1996, 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 1996.)
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds 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.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of an investment in
a Fund.
Currently, there are more mutual funds than there are stocks listed on the
Exchange. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectuses, shares of a Fund are generally sold
through securities dealers or other financial institutions. Investment
representatives of such securities dealers or financial institutions are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
Each Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and/or
other long-term goals. The Franklin College Costs Planner may assist you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in a Fund
cannot guarantee that such goals will be met.
Miscellaneous Information
Each Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $140
billion in assets under management for more than 4 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offer to the public 115 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
$42 billion in municipal bond assets for over half a million investors.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked number 2 out of 1,000 investment
advisory firms surveyed by TMS Holdings, Inc. As of August 31, 1995, this
ranking was unchanged.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
From time to time advertisements or sales material issued by a 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 annual amount of time the average taxpayer works to satisfy his or
her tax obligations to the federal, state and local taxing authorities.
As of February 12, 1996, the principal shareholder of the Insured Fund-Class II,
beneficial or of record, was as follows:
Share
Name and Address Amount Percentage
Brewster J. Chase
252 Etna Rd.
Ithaca, NY 14850-91226..... 6,476.684 5.9%
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a compliance officer and, within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
As a shareholder of a Massachusetts business trust, you could under certain
circumstances, be held personally liable as partners for its obligations. The
Trust's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of Trust assets if you are held personally liable for obligations
of the Trust. The Declaration of Trust provides that the Trust shall, upon
request, assume the defense of any claim made against you for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of a Fund. The Declaration of Trust further provides that
the Trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of a Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Trust
itself is unable to meet its obligations.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control your account, a 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 Trust's Annual Report to
Shareholders for the fiscal year ended December 31, 1995, including the
auditors' report, are incorporated herein by reference.
Appendices
APPENDIX A - RISK FACTORS AFFECTING NEW YORK MUNICIPAL SECURITIES
The following information as to certain New York State ("State") and New York
City ("City") risk factors is given to you in view of the policy of each Fund of
concentrating its investments in New York issuers. The information provided
constitutes only a brief discussion, does not purport to be a complete
description and is based on information from sources believed by the Trust to be
reliable, including official statements relating to securities offerings of the
state of New York and municipal issuers, and periodic publications by national
ratings organizations. This information, however, has not been independently
verified by the Trust.
New York State. Constitutional challenges to State laws have limited the amount
of taxes that political subdivisions can impose on real property. In 1979, the
State's highest court declared unconstitutional a State law allowing localities
and school districts to impose a special increase in real estate property taxes
in order to raise funds for pensions and other uses. Additional court actions
have been brought against the State, certain agencies and municipalities
relating to financing, the amount of real estate tax, and the use of tax
revenues that could affect the ability of the State or its political
subdivisions to pay their obligations, require extraordinary appropriations or
expenditure reductions, or both, and which could have a material adverse effect
upon the financial condition of the State and various of its agencies and
subdivisions.
A substantial principal amount of bonds issued by various State agencies and
authorities are either guaranteed by the State or supported by the State through
lease-purchase arrangements, or other contractual or moral obligation
provisions. Moral obligation commitments by the State impose no immediate
financial obligations on the State and require appropriations by the legislature
before any payments can be made. Failure of the State to appropriate necessary
amounts or to take other action to permit the authorities and agencies to meet
their obligations could result in defaults on such obligations. If a default
were to occur, it would likely have a significant adverse impact on the market
price of obligations of the State and its authorities and agencies. In recent
years, the State has had to appropriate large amounts of funds to enable State
agencies to meet their financial obligations and, in some cases, prevent
default. Additional assistance is expected to be required in current and future
fiscal years since certain localities and authorities continue to experience
financial difficulties.
To the extent State agencies and local governments require State assistance to
meet their financial obligations, the ability of the state of New York to meet
its own obligations as they become due or to obtain additional financing could
be adversely affected. This financial situation could result not only in
defaults of State and agency obligations but also impairment of the
marketability of securities issued by the State, its agencies and local
governments.
Beginning in 1989, as a result of the recession that affected the entire nation,
the state of New York experienced the largest and longest contraction in its
labor force since the 1930s, with a loss of more than 500,000 jobs between
mid-1989 and mid-1993. The State's economy has begun to recover, although at a
slower pace than that of the nation as a whole. The State's employment is not
projected to reach prerecession levels until the end of 1998, with average
growth of 1.1% per year compared to the nation's 1.6%. Much of the State's
projected increase in employment levels is expected to come from growth in the
State's service and trade sectors, which in 1994 accounted for approximately
31.5% and 20.2%, respectively, of the State's total employment. The State's
manufacturing sector, which currently represents approximately 12% of the
State's total employment, is expected to continue to decline at an annual rate
of 1.2%.
New York is the third most populated state in the nation. The State's per capita
income exceeded the national average by 19.2% in 1994, although real income
growth is projected to lag behind the nation by 0.9%. Debt levels are considered
high and continue to rise on both a per capita basis and as a percentage of
income. For example, debt per capita was $1,536 in 1995 compared with $549 in
1986. Debt service represented 5.9% of general fund tax receipts in fiscal 1995.
Servicing this debt will continue to impose a burden on the State.
The State's fiscal year 1995 financial report showed signs of continued
improvement in the State's financial performance with a decline in the general
fund operating deficit as a result of a reduction in spending by almost $850
million. The State's fiscal 1996 financial plan was balanced and included the
first phase of a income tax reduction plan.
Current projections for fiscal year 1997 show a budget deficit of as much as
$3.9 billion. It is anticipated, however, that the fiscal and debt reforms
during the past two years will continue in the immediate future.
New York City. In 1975, New York City suffered several financial crises that
impaired and continue to impair the borrowing ability of both the City and the
State. In that year, the City lost access to public credit markets. The City was
not able to sell short-term or long-term notes to the public until 1979 and
1981, respectively. To help New York City out of its financial difficulties, the
State Legislature created the Municipal Assistance Corporation ("MAC") in 1975.
MAC has the authority to issue bonds and notes and pay or lend the proceeds to
the City. MAC also has the authority to exchange its obligations for City
obligations. MAC bonds are payable out of certain State sales and use taxes
imposed by the City, State stock transfer taxes and per capita State aid to the
City. The State is not, however, obligated to continue these taxes, to continue
appropriating revenues from these taxes, nor to continue the appropriation of
per capita State aid to pay MAC obligations. MAC does not have taxing powers,
and its bonds are not obligations enforceable against either the City or the
State.
Since 1975, the City's financial condition has been subject to oversight and
review by the New York State Financial Control Board (the "FCB"), and since 1978
its financial statements have been audited by independent accounting firms. To
be eligible for guarantees and assistance, the City was annually required to
submit a financial plan to the FCB for the next four fiscal years, covering the
City and certain agencies, showing balanced budgets determined in accordance
with generally accepted accounting principles. Although the FCB's powers of
prior approval were suspended effective June 30, 1986, because the City had
satisfied certain statutory conditions, the City continues to submit four-year
plans to the FCB for its review. In the event of a year-end operating deficit
greater than $100 million, the FCB has the authority to assume a significant
degree of control over the City's finances, which includes the ability to
approve or disapprove contracts and the City's four-year financial plan.
On January 17, 1995, S&P placed the City's general obligation bonds on
CreditWatch with negative implications, as a result of the City's plan to shift
$120 million of current debt costs to future years through the refunding of such
debt. This action resulted from an estimated $650 million budget gap for the
fiscal year and the role of certain fundamental economic forces. The ratings of
the City's short-term notes and insured issues were not affected.
While it appears that the financial services sector will drive growth in tax
revenues, the City's high energy costs and overall tax burden relative to
surrounding areas have contributed to corporate and residential relocations over
the last decade. Employment growth is expected to average only 1% between 1996
and 1999, but personal income is still expected to reflect the national trend of
4.25% average annual growth, due in part to the higher incomes paid in the
financial services industry.
The failure to achieve budgetary relief from higher levels of government,
expenditure reduction plans that were less successful than anticipated, normal
forecasting errors in estimating tax revenues and other considerations have
resulted in a projected $759 million gap for the remainder of the 1996 fiscal
year. Projections for the City's fiscal year 1997 estimate a budget deficit of
$2 billion. Efforts to close this gap will focus on reductions and spending cuts
in the areas of welfare and healthcare entitlements, and cuts in City services
and personnel.
Both the State and City face potential economic problems that could seriously
affect their ability to meet their financial obligations. The economic problems
of New York City adversely affect the State in numerous ways. In addition, for
decades the State economy has grown more slowly than that of the nation as a
whole, resulting in a decline in the position of New York as one of the
country's wealthiest states. The causes of this decline are varied and complex
and some causes reflect international and national trends beyond the State's and
City's control. Some analysts feel that this long-term decline is the result of
State and local taxation, which is among the highest in the nation, and which
may cause corporations to locate outside the State. The current high level of
taxes limits the ability of the State and City to impose higher taxes in the
event of future difficulties.
APPENDIX B - DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Description of Municipal Bond Ratings
Moody's
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Municipal bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA: Municipal bonds rated AAA are considered to be of investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal which is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA, and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefor impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Description of Municipal Note Ratings
Moody's
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
NYT SAI 05/96
