PROSPECTUS & APPLICATION
FRANKLIN NEW YORK
TAX-FREE INCOME FUND
INVESTMENT STRATEGY
TAX-FREE INCOME
OCTOBER 1, 1998
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated October 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN NEW YORK
TAX-FREE INCOME FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How Does the Fund Invest Its Assets? ............................. 5
What Are the Risks of Investing in the Fund? ..................... 9
Who Manages the Fund? ............................................ 11
How Taxation Affects the Fund and Its Shareholders ............... 13
How Is the Trust Organized? ...................................... 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 17
May I Exchange Shares for Shares of Another Fund? ................ 24
How Do I Sell Shares? ............................................ 26
What Distributions Might I Receive From the Fund? ................ 28
Transaction Procedures and Special Requirements .................. 29
Services to Help You Manage Your Account ......................... 33
What If I Have Questions About My Account? ....................... 36
GLOSSARY
Useful Terms and Definitions ..................................... 36
FRANKLIN
NEW YORK TAX-FREE
INCOME FUND
OCTOBER 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of each class for the fiscal
year ended May 31, 1998. The fund's actual expenses may vary.
CLASS I CLASS II
- ------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) ........ 4.25% 1.99%
Paid at time of purchase ................... 4.25%++ 1.00%+++
Paid at redemption++++ ..................... None 0.99%
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ............................ 0.46% 0.46%
Rule 12b-1 Fees ............................ 0.07%* 0.65%*
Other Expenses ............................. 0.05% 0.05%
--------------------
Total Fund Operating Expenses .............. 0.58% 1.16%
====================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
CLASS I $48** $60 $74 $112
CLASS II $32 $46 $73 $149
For the same Class II investment, you would pay projected expenses of $22 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. The charge is 1% of the value
of the shares sold or the Net Asset Value at the time of purchase, whichever
is less. The number in the table shows the charge as a percentage of Offering
Price. While the percentage is different depending on whether the charge is
shown based on the Net Asset Value or the Offering Price, the dollar amount
you would pay is the same. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for details.
*These fees may not exceed 0.10% for Class I and 0.65% for Class II. 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 charge permitted under the rules of the National
Association of Securities Dealers, Inc.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditor. The
audit report covering each of the most recent five years appears in the
Trust's Annual Report to Shareholders for the fiscal year ended May 31, 1998.
The Annual Report to Shareholders also includes more information about the
fund's performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED MAY 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net asset value,
beginning of year $11.66 $11.46 $11.75 $11.72 $12.07 $11.45 $10.94 $10.85 $11.05 $10.52
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .66 .68 .70 .73 .75 .77 .78 .80 .80 .80
Net realized and unrealized
gains (losses) .45 .23 (.28) .06 (.34) .63 .52 .09 (.21) .54
-------------------------------------------------------------------------------------
Total from investment operations 1.11 .91 .42 .79 .41 1.40 1.30 .89 .59 1.34
------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.66) (.68) (.71) (.76) (.76) (.78) (.79) (.80) (.79) (.81)
Net realized gains (.03) (.03) - - - - - - - -
--------------------------------------------------------------------------------------
Total distributions (.69) (.71) (.71) (.76) (.76) (.78) (.79) (.80) (.79) (.81)
--------------------------------------------------------------------------------------
Net asset value, end of year $12.08 $11.66 $11.46 $11.75 $11.72 $12.07 $11.45 $10.94 $10.85 $11.05
======================================================================================
Total return* 9.83% 8.16% 3.65% 7.10% 3.18% 12.35% 12.05% 8.20% 5.25% 12.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $4,824 $4,705 $4,709 $4,725 $4,610 $4,339 $3,571 $3,108 $2,915 $2,795
Ratios to average net assets:
Expenses .58% .59% .58% .57% .52% .52% .51% .50% .50% .51%
Net investment income 5.57% 5.87% 5.99% 6.39% 6.19% 6.56% 7.01% 7.34% 7.30% 7.42%
Portfolio turnover rate 18.51% 11.18% 28.34% 40.56% 25.67% 12.28% 19.37% 18.62% 15.47% 25.68%
</TABLE>
<TABLE>
<CAPTION>
CLASS II
YEAR ENDED MAY 31,
<S> <C> <C> <C> <C>
1998 1997 1996 19951,2
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net asset value, beginning of year $11.65 $11.45 $11.73 $11.50
--------------------------------------------------
Income from investment operations:
Net investment income .......... .59 .63 .65 .05
Net realized & unrealized gains (losses) .45 .21 (.29) .24
--------------------------------------------------
Total from investment operations 1.04 .84 .36 .29
--------------------------------------------------
Less distributions from:
Net investment income .......... (.59) (.61) (.64) (.06)
Net realized gains ............. (.03) (.03) - -
--------------------------------------------------
Total distributions ............. (.62) (.64) (.64) (.06)
--------------------------------------------------
Net asset value, end of year .... $12.07 $11.65 $11.45 $11.73
==================================================
Total return* ................... 9.20% 7.52% 3.14% 2.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) . $108,686 $74,195 $39,047 $1,913
Ratios to average net assets:
Expenses ....................... 1.16% 1.17% 1.16% 1.09%**
Net investment income .......... 4.98% 5.30% 5.43% 5.32%**
Portfolio turnover rate ......... 18.51% 11.18% 28.34% 40.56%
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE AND IS NOT ANNUALIZED. BEFORE MAY 1, 1994, DIVIDENDS FROM NET
INVESTMENT INCOME WERE REINVESTED AT THE OFFERING PRICE.
**ANNUALIZED.
1PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE DAILY AVERAGE SHARES
OUTSTANDING DURING THE PERIOD FOR CLASS II.
2FOR THE PERIOD MAY 1, 1995 (EFFECTIVE DATE) TO MAY 31, 1995, THE FUND PAID A
DIVIDEND TO SHAREHOLDERS OF RECORD ON THE BEGINNING OF BUSINESS, MAY 1, 1995,
IN THE AMOUNT OF $.06 PER SHARE. THE NET ASSET VALUE PER SHARE AT THE
BEGINNING OF THE PERIOD INCLUDES THIS DIVIDEND.
HOW DOES THE FUND INVEST ITS ASSETS?
A QUICK LOOK AT THE FUND
GOAL: High current tax-free income for New York residents.
STRATEGY: Invests in investment grade municipal securities whose interest is
free from federal and New York personal income taxes.
WHAT IS THE MANAGER'S APPROACH?
The fund's manager tries to select securities that it believes will provide
the best balance between risk and return within the fund's range of allowable
investments. The manager considers a number of factors, including general
market and economic conditions and the credit quality of the issuer, when
selecting securities for the fund.
To provide tax-free income to shareholders, the manager typically uses a buy
and hold strategy. This means it holds securities in the fund's portfolio for
income purposes, rather than trading securities for capital gains. The
manager may sell a security at any time, however, when it believes doing so
could help the fund meet its goals.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses. The
fund's focus on income does not mean it invests only in the highest-yielding
securities available, or that it can avoid losses of principal.
WHO MAY WANT TO INVEST?
The fund may be appropriate for investors in higher tax brackets who seek
high current income that is free from federal and New York personal income
taxes.
The value of the fund's investments and the income they generate will vary
from day to day, and generally reflect interest rates, market conditions, and
other federal and state political and economic news. When you sell your
shares, they may be worth more or less than what you paid for them. Please
consider your investment goals and tolerance for price fluctuations and risk
when making your investment decision.
THE FUND IN MORE DETAIL
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of dividend income exempt from federal, New York state and New York City
income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. This goal is fundamental, which means
that it may not be changed without shareholder approval.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
Municipal securities generally pay interest free from federal income tax.
Municipal securities issued by New York state or its counties,
municipalities, authorities, agencies, or other subdivisions ("New York
municipal securities"), as well as municipal securities issued by U.S.
territories such as Guam, Puerto Rico, or the U.S. Virgin Islands, also
generally pay interest free from New York state and New York City personal
income taxes for New York residents.
The fund normally invests:
o at least 80% of its total assets in securities that pay interest free
from federal income taxes, including the federal alternative minimum tax
(this policy is fundamental);
o at least 65% of its total assets in securities that pay interest free
from the personal income taxes of New York state and New York City,
although the fund tries to invest all of its assets in these securities;
and
o at least 65% of its total assets in New York municipal securities.
While the fund tries to invest 100% of its assets in tax-free municipal
securities, it is possible, although not anticipated, that the fund may have
a significant amount of its assets in securities that pay taxable interest.
If you are subject to the federal alternative minimum tax, please keep in
mind that the fund may also have a portion of its assets in municipal
securities that pay interest subject to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities
based on their opinion of the issuer's credit quality. Most rating agencies
use a descending alphabet scale to rate long-term securities. For example,
Fitch and S&P use AAA, AA, A and BBB for their top four long-term ratings,
while Moody's uses Aaa, Aa, A and Baa. Securities in the top four ratings are
"investment grade," although securities in the fourth highest rating may have
some speculative features. These ratings are described in more detail in the
SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
o The fund only buys investment grade securities or unrated securities
that the manager believes are comparable.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from less than one year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields.
o The fund has no restrictions on the maturity of the securities it may buy
or on its average portfolio maturity, although it currently invests
primarily in long-term securities.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either
at specific intervals or whenever a benchmark rate changes. While this
feature helps to protect against a decline in the security's market price, it
also lowers the fund's income when interest rates fall. Of course, the fund's
income from its variable rate investments may also increase if interest rates
rise.
o The fund may invest in investment grade variable and floating rate
securities.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body
must set aside the money to make the lease payments each year. If the money
is not set aside, the issuer or the lessee can end the lease without penalty.
If the lease is cancelled, investors who own the municipal lease obligations
may not be paid.
o The fund may invest in municipal lease obligations without limit, if
the obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest the fund's portfolio in a
temporary defensive manner. Under these circumstances, the fund may invest
all of its assets in securities that pay taxable interest, including (i)
municipal securities issued by a state or local government other than New
York, or by a U.S. territory such as Guam, Puerto Rico or the U.S. Virgin
Islands; (ii) high quality commercial paper and obligations of U.S. banks
(including commercial banks and savings and loan associations) with assets of
$1 billion or more; or (iii) securities issued or guaranteed by the full
faith and credit of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price
of the security may fluctuate during the time before payment and delivery,
the fund assumes the risk that the value of the security at delivery may be
more or less than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in any one state or type
of project to help spread and reduce the risks of investment. A fund can be
either diversified or non-diversified. A non-diversified fund may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. A non-diversified fund may be more
sensitive to these changes.
o The fund is a diversified fund. The fund may, however, invest more than
25% of its assets in municipal securities that finance similar types of
projects, such as hospitals, housing, industrial development,
transportation or pollution control.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
Like all investments, an investment in the fund involves risks. The risks of
the fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in the fund may involve
more risk than an investment in a fund that does not focus on securities of a
single state. Because the fund holds many securities, it is likely to be less
risky than any one, or few, directly held municipal investments.
GENERAL RISK. There is no assurance that the fund will meet its investment
goal. The fund's share price, and the value of your investment, may change.
Generally, when the value of the fund's investments go down, so does the
fund's share price. Similarly, when the value of the fund's investments go
up, so does the fund's share price. Since the value of the fund's shares can
go up or down, it is possible to lose money by investing in the fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices
fall. The opposite is also true: municipal security prices go up when
interest rates fall. To explain why this is so, assume you hold a municipal
security offering a 5% yield. A year later, interest rates are on the rise
and comparable securities are offered with a 6% yield. With higher-yielding
securities available, you would have trouble selling your 5% security for the
price you paid - causing you to lower your asking price. On the other hand,
if interest rates were falling and 4% municipal securities were being
offered, you would be able to sell your 5% security for more than you paid.
INCOME RISK is the risk that the fund's income will decrease due to falling
interest rates. Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. Changes in the credit quality of the credit provider could
affect the value of the security and the fund's share price.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, the fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and its distributions to shareholders.
NEW YORK RISKS. Since the fund invests heavily in New York municipal
securities, events in New York are likely to affect the fund's investments
and its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to New York's municipal issuers.
A negative change in any one of these or other areas could affect the ability
of New York's municipal issuers to meet their obligations. Both New York
state and New York City have experienced financial difficulties in the past.
It is important to remember that economic, budget and other conditions within
New York are unpredictable and can change at any time.
FOR MORE INFORMATION ABOUT THE FUND'S RISKS. The fund's SAI also has
information about the fund's investment policies and their risks, including
specific information on New York's economy and financial strength. Please see
"How Does the Fund Invest Its Assets?" and "What Are the Risks of Investing
in the Fund?" in the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. As of October 1, 1998, Franklin Advisers, Inc. manages
the fund's assets and makes its investment decisions. The manager also
performs similar services for other funds. It is wholly owned by Resources, a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, the manager and its affiliates manage
over $236 billion in assets, including $49 billion in the municipal
securities market. The terms and conditions of the management services the
manager provides to the fund are the same as those of the previous manager.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is:
Mark Orsi
Portfolio Manager, Franklin Advisers, Inc.
Mr. Orsi has been an analyst or portfolio manager for the fund since 1990. He
holds a Bachelor of Science degree in Finance from Santa Clara University. He
joined the Franklin Templeton Group in 1990. He is a member of several
securities industry-
related committees and associations.
Thomas Kenny
Executive Vice President, Franklin Advisers, Inc.
Mr. Kenny has been an analyst or portfolio manager for the fund since 1987.
He 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 the Franklin Templeton Group in 1986. He is a
member of several securities industry-related committees and associations.
Sheila Amoroso
Vice President, Franklin Advisers, Inc.
Ms. Amoroso has been an analyst or portfolio manager for the fund since 1987.
She holds a Bachelor of Science degree from San Francisco State University.
She joined the Franklin Templeton Group in 1986. She is a member of several
securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended May 31, 1998, management fees
totaling 0.46% of the average monthly net assets of the fund were paid to the
manager. Total expenses, including fees paid to the manager, were 0.58% for
Class I and 1.16% for Class II.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended May 31, 1998, administration fees totaling 0.09% of the
average daily net assets of the fund were paid to FT Services. These fees are
paid by the manager. They are not a separate expense of the fund. Please see
"Investment Management and Other Services" in the SAI for more information.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely
affected if the computer systems used by the manager and other service
providers do not properly process date-related information on or after
January 1, 2000 ("Year 2000 Issue"). The Year 2000 Issue could affect
portfolio and operational areas including securities trade processing,
interest and dividend payments, securities pricing, shareholder account
services, reporting, custody functions, and others. While there can be no
assurance that the fund will not be adversely affected, the manager and its
affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking
reasonable assurances from the fund's other major service providers.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class I plan may not exceed 0.10% per year of
Class I's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plan, the fund may pay Distributors up to 0.50% per year
of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class II
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW TAXATION AFFECTS ----------------------------------
THE FUND AND ITS SHAREHOLDERS HOW DOES THE FUND EARN INCOME
AND GAINS?
TAXATION OF THE FUND'S INVESTMENTS. The
fund invests your money in the municipal The fund earns interest and other
and other securities described in the income (the fund's "income") on
section "How Does the Fund Invest Its its investments. When the fund
Assets?" Special tax rules may apply when sells a security for a price that
determining the income and gains that the is higher than it paid, it has a
fund earns on its investments. These rules gain. When the fund sells a
may, in turn, affect the amount of security for a price that is lower
distributions that the fund pays to you. than it paid, it has a loss. If
These special tax rules are discussed in the fund has held the security for
the SAI. more than one year, the gain or
loss will be a long-term capital
TAXATION OF THE FUND. As a regulated gain or loss. If the fund has held
investment company, the fund generally the security for one year or less,
pays no federal income tax on the income the gain or loss will be a
and gains that it distributes to you. short-term capital gain or loss.
The fund's gains and losses are
netted together, and, if the fund
has a net gain (the fund's "gains"),
that gain will generally be
distributed to you.
----------------------------------
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions made to you ----------------------------------
from interest income on municipal WHAT IS A DISTRIBUTION?
securities will be exempt from the regular
federal income tax. Distributions made to As a shareholder, you will receive
you from other income on temporary your share of the fund's income
investments, short-term capital gains, or and gains on its investments. The
ordinary income from the sale of market fund's interest income on
discount bonds will be taxable to you as municipal securities is paid to
ordinary dividends, whether you receive you as exempt-interest dividends.
them in cash or in additional shares. The fund's ordinary income and
Distributions made to you from interest on short-term capital gains are paid
certain private activity bonds, while to you as ordinary dividends. The
still exempt from the regular federal fund's long-term capital gains are
income tax, are a preference item when paid to you as capital gain
determining your alternative minimum tax. distributions. If the fund pays
you an amount in excess of its
The fund will send you a statement in income and gains, this excess will
January of the current year that reflects generally be treated as a
the amount of exempt-interest dividends, non-taxable distribution. These
ordinary dividends, capital gain amounts, taken together, are what
distributions, interest income that is a we call the fund's distributions
tax preference item under the alternative to you.
minimum tax and non-taxable distributions -----------------------------------
you received from the fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year.
The IRS requires you to report these amounts on your income tax return
for the prior year.
DIVIDENDS-RECEIVED DEDUCTION. It is -----------------------------------
anticipated that no portion of the fund's WHAT IS A REDEMPTION?
distributions will qualify for the
corporate dividends-received deduction. A redemption is a sale by you to
the fund of some or all of your
REDEMPTIONS AND EXCHANGES. If you redeem shares in the fund. The price per
your shares or if you exchange your share you receive when you redeem
shares in the fund for shares in fund shares may be more or less
another Franklin Templeton Fund, you will than the price at which you
generally have a gain or loss that the IRS purchased those shares. An
requires you to report on your income tax exchange of shares in the fund for
return. If you exchange fund shares held shares of another Franklin
for 90 days or less and pay no sales Templeton Fund is treated as a
charge, or a reduced sales charge, for the redemption of fund shares and then
new shares, all or a portion of the sales a purchase of shares of the other
charge you paid on the purchase of the fund. When you redeem or exchange
shares you exchanged is not included in your shares, you will generally
their cost for purposes of computing gain have a gain or loss, depending
or loss on the exchange. If you hold your upon whether the amount you
shares for six months or less, any loss receive for your shares is more or
you have will be disallowed to the extent less than your cost or other basis
of any exempt-interest dividends paid on in the shares. Please call Fund
your shares. Any such loss not disallowed Information for a free shareholder
will be treated as a long-term capital Tax Information Handbook if you
loss to the extent of any long-term need more information on
capital gain distributions paid on your calculating the gain or loss on
shares. All or a portion of any loss on the redemption or exchange of your
the redemption or exchange of your shares shares.
will be disallowed by the IRs if you buy -----------------------------------
other shares in the fund within 30 days before or after your redemption
or exchange.
NEW YORK STATE TAXES. Ordinary dividends and capital gain distributions that
you receive from the fund, and gains arising from redemptions or exchanges of
your fund shares, will generally be subject to state and local income tax.
Distributions paid from the interest earned on New York municipal securities
will generally be exempt from New York state and New York City personal income
taxes. Dividends paid from interest earned on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands and Guam) will also generally be exempt from New York state and New
York City personal income taxes. Investments in municipal securities of other
states generally do not qualify for tax-free treatment. Corporate taxpayers
subject to the New York state franchise tax are subject to special rules. The
holding of fund shares may also be subject to state and local intangibles
taxes. The fund will provide you with information at the end of each calendar
year on the amounts of such dividends that may qualify for exemption from
reporting on your individual income tax returns. You may wish to contact your
tax advisor to determine the state and local tax consequences of your
investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS. Exempt-interest dividends
paid to you, although exempt from the regular federal income tax, are
includible in the tax base for determining the taxable portion of your social
security or railroad retirement benefits. The IRS requires you to disclose
these exempt-interest dividends on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends
generally will be subject to U.S. income -----------------------------------
tax withholding. Your home country may WHAT IS A BACKUP
also tax ordinary dividends, WITHHOLDING?
exempt-interest dividends, capital gain
distributions and gains arising from Backup withholding occurs when the
redemptions or exchanges of your fund fund is required to withhold and
shares. Fund shares held by the estate of pay over to the IRS 31% of your
a non-U.S. investor may be subject to U.S. distributions and redemption
estate tax. You may wish to contact your proceeds. You can avoid backup
tax advisor to determine the U.S. and withholding by providing the fund
non-U.S. tax consequences of your with your TIN, and by completing
investment in the fund. the tax certifications on your
shareholder application that you
BACKUP WITHHOLDING. When you open an were asked to sign when you opened
account, IRS regulations require that you your account. However, if the IRS
provide your taxpayer identification instructs the fund to begin backup
number ("TIN"), certify that it is withholding, it is required to do
correct, and certify that you are not so even if you provided the fund
subject to backup withholding under IRS with your TIN and these tax
rules. If you fail to provide a correct certifications, and backup
TIN or the proper tax certifications, the withholding will remain in place
IRS requires the fund to withhold until the fund is instructed by
31% of all the distributions (including the IRS that it is no longer
ordinary dividends and capital gain required.
distributions), and redemption -----------------------------------
proceeds paid to you. The fund is also required to begin backup withholding on
your account if the IRS instructs the fund to do so. The fund reserves the right
not to open your account, or, alternatively, to redeem your shares at the
current Net Asset Value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper tax certifications, or the IRS instructs
the fund to begin backup withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX TREATMENT TO YOU
OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, INTEREST INCOME THAT IS A TAX
PREFERENCE ITEM AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE
FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY
CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The fund is a diversified series of Franklin New York Tax-Free Income Fund
(the "Trust"), an open-end management investment company, commonly called a
mutual fund. It was organized as a New York corporation on May 14, 1982,
reorganized as a Delaware business trust in its present form on May 1, 1997,
and is registered with the SEC. The fund offers two classes of shares:
Franklin New York Tax-Free Income Fund - Class I and Franklin New York
Tax-Free Income Fund - Class II. All shares outstanding before the offering
of Class II shares are considered Class I shares. Additional series and
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A
meeting may also be called by the Board in its discretion or by shareholders
holding at least 10% of the outstanding shares. In certain circumstances, we
are required to help you communicate with other shareholders about the
removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular account ................................$1,000
o To open a custodial account for a minor
(an UGMA/UTMA account) .....................................$ 100
o To open an account with an automatic
investment plan ...........................................$ 50
o To add to an account .....................................$ 50
We reserve the right to change the amount of these minimums from time
to time or to waive or lower these minimums for certain purchases. We
also reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive
a wire control number and wire instructions.
You need a new wire control number every time
you wire money into your account.
If you do not have a currently effective wire
control number, we will return the money to
the bank, and we will not credit the purchase
to your account.
2. For an initial investment you must also return
your signed shareholder application to the
fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the receipt
of wired funds to the fund by 3:00 p.m. Pacific
time, we will credit the purchase to your account
that day.
If we receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we will
credit the purchase to your account the following
business day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales charges than o Lower front-end sales charges
Class II shares. There are several than Class I shares
ways to reduce these charges, as
described below. There is no
front-end sales charge for purchases
of $1 million or more.*
o Contingent Deferred Sales Charge on o Contingent Deferred Sales Charge
purchases of $1 million or more sold on purchases sold within 18 months
within one year
o Lower annual expenses than Class II o Higher annual expenses than Class
shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
CLASS I
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
CLASS II
Under $1,000,000* ................. 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts.
LETTER OF INTENT - CLASS I ONLY. You may buy 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.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the same class of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these 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 the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
5. Registered Securities Dealers and their affiliates, for their
investment accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested.
3. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 2 above will be eligible to
receive the Rule 12b-1 fee associated with the purchase starting in the
thirteenth calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class II shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. If you
have never paid a sales charge on your shares because, for example, they have
always been held in a money fund, you will pay the fund's applicable sales
charge no matter how long you have held your shares. These charges may not
apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. For accounts with shares subject to a Contingent Deferred Sales
Charge, we will first exchange any shares in your account that are not
subject to the charge. If there are not enough of these to meet your exchange
request, we will exchange shares subject to the charge in the order they were
purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the fund does not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Advisor Class" or "Class Z" shares. Because the
fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of the fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class I
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class I shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to a
bank account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under
court jurisdiction may have other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the fund
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request 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
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an
annual balance of $10,000 in Class II shares, $1,200 may be redeemed
annually free of charge.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
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.
The fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them
on or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution. If you buy shares just before the fund deducts a capital
gain distribution from its Net Asset Value, you will receive a portion of the
price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy 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. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy 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 receive dividends, or both
dividend and capital gain distributions in cash. If you have the money
sent to another person or to a checking or savings account, you may need
a signature guarantee. If you send the money to a checking or savings
account, please see "Electronic Fund Transfers" under "Services to Help
You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
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 YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
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STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to accounts managed by the Franklin
Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings 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 included with this prospectus or contact your
investment representative. 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 discontinue the program at any time
by calling Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50.
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 direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with 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. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 115 for Class I and 215 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period begins on the day you buy
your shares. For example, if you buy shares on the 18th of the month, they
will age one month on the 18th day of the next month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
FRANKLIN
NEW YORK TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.................................... 2
What Are the Risks of Investing in
the Fund? ............................................................. 5
Investment Restrictions ................................................ 7
Officers and Trustees .................................................. 8
Investment Management and
Other Services ........................................................ 12
How Does the Fund Buy Securities
for Its Portfolio? .................................................... 13
How Do I Buy, Sell and Exchange Shares? ................................ 14
How Are Fund Shares Valued? ............................................ 16
Additional Information on
Distributions and Taxes ............................................... 17
The Fund's Underwriter ................................................. 20
How Does the Fund
Measure Performance? .................................................. 22
Miscellaneous Information .............................................. 24
Financial Statements ................................................... 26
Useful Terms and Definitions ........................................... 26
Appendix
Description of Ratings ................................................ 26
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- ------------------------------------------------------------------------------
The fund is a diversified series of Franklin New York Tax-Free Income Fund
(the "Trust"), an open-end management investment company. The Prospectus,
dated October 1, 1998, which we may amend from time to time, contains the
basic information you should know before investing in the fund. For a free
copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of dividend income exempt from federal, New York state and New York City
income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. This goal is fundamental, which means
that it may not be changed without shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
The fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
Below is a description of various types of municipal and other securities
that the fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which the fund may
also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities 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 similar to tax anticipation notes except they
are issued in expectation of the receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing Program.
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued 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 meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge,
if any, of the facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES. The fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. The fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews the
fund's municipal lease obligations to assure that they are liquid investments
based on various factors reviewed by the fund's investment manager and
monitored by the Board. These factors include (a) the credit quality of the
obligations and the extent to which they are rated or, if unrated, comply
with existing criteria and procedures followed to ensure that they are
comparable in quality to the ratings required for the fund to invest,
including an assessment of the likelihood of the lease being canceled, taking
into account how essential the leased property is and the term of the lease
compared to the useful life of the leased property; (b) the size of the
municipal securities market, both in general and with respect to municipal
lease obligations; and (c) the extent to which the type of municipal lease
obligations held by the fund trade on the same basis and with the same degree
of dealer participation as other municipal securities of comparable credit
rating or quality.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest. Keeping in mind
that the fund can invest in municipal lease obligations without percentage
limits, as of May 31, 1998, the fund held 22.42% of its net assets in
municipal lease obligations.
CALLABLE BONDS. The fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. The fund's manager may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. If the fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the fund also may not be
able to recover the full amount it paid for the bond. One way for the fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the fund's callable bonds
may impact the fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by the manager, the
fund believes it has reduced the risk of an adverse impact on its Net Asset
Value from calls of callable bonds. In light of the fund's pricing policies
and certain amortization procedures required by the IRS, the fund does not
expect to suffer any material adverse impact related to the value at which it
has carried the bonds in connection with calls of bonds purchased at a
premium. As with any investment strategy, however, there is no guarantee that
a call may not have a more substantial impact than anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. The fund may invest in zero-coupon and delayed
interest securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the
issuer defaults, the fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value is generally more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zero-coupon securities 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.
An investment in zero-coupon and delayed interest securities may cause the
fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. To generate cash to satisfy
distribution requirements, the fund may have to sell portfolio securities
that it otherwise would have continued to hold or to use cash flows from
other sources such as the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The fund may invest a portion of its
assets in convertible and step coupon bonds. Convertible bonds are
zero-coupon securities until a predetermined date, at which time they convert
to a specified coupon security. The coupon on step coupon bonds changes
periodically during the life of the security based on predetermined dates
chosen when the security is issued.
U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies
and instrumentalities of the U.S. government and are backed by the full faith
and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The fund may invest in taxable commercial paper only
for temporary defensive purposes.
MORE INFORMATION ABOUT SOME OF THE FUND'S
OTHER INVESTMENT STRATEGIES AND PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The fund believes that
its Net Asset Value or income will not be negatively affected by its purchase
of municipal securities on a when-issued basis. The fund will not engage in
when-issued transactions for investment leverage purposes.
Although the fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
fund is the buyer, it will maintain cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. If assets
of the fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
ILLIQUID INVESTMENTS. The fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are generally securities that cannot
be sold within seven days in the normal course of business at approximately
the amount at which the fund has valued them.
DIVERSIFICATION. The fund is a diversified fund. As a fundamental policy, the
fund will not buy a security if more than 5% of the value of its total assets
would be in the securities of any single issuer. This limitation does not
apply to investments issued or guaranteed by the U.S. government or its
instrumentalities. For the purpose of determining diversification, each
political subdivision, agency, or instrumentality, each multi-state agency of
which a state is a member, and each public authority that issues private
activity bonds on behalf of a private entity, is considered a separate
issuer. For securities backed only by the assets or revenues of a particular
instrumentality, facility or subdivision, the entity is considered the
issuer. If the creating government or other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of the
government or other entity. A guarantee of a security is not considered a
security issued by the guarantor, however, if the value of all securities
issued or guaranteed by that guarantor, and owned by the fund, does not
exceed 10% of the fund's total assets.
Escrow-secured or defeased bonds are not generally considered an obligation
of the original municipality when determining diversification. Defeased bonds
may be excluded from issuer diversification calculations under the following
conditions: (i) only U.S. government securities may be deposited into the
escrow account; (ii) the deposit must be irrevocable and pledged only to the
debt service of the underlying bonds, so that the deposited securities will
not be subject to the claims of other creditors of the issuer, even in the
case of economic defeasance; (iii) the escrow agent may not be an affiliated
person of the issuer or an affiliated person of an affiliated person of the
issuer under the 1940 Act, and may not have a lien of any type on the
deposited securities for payment of its fees, except with respect to excess
securities; and (iv) an independent certified public accountant, counsel to
holders of the original bond, or other party acceptable to a nationally
recognized rating service must verify at the time of the initial deposit of
securities and at the time any substitute securities are deposited into the
escrow account that the securities will satisfy all scheduled principal,
interest, and any applicable premiums on the original bonds. Nonetheless, the
fund may not invest more than 25% of its total assets in defeased bonds of
the same municipal issuer.
The fund intends to meet certain diversification requirements for tax
purposes. These requirements are discussed under "Additional Information on
Distributions and Taxes."
The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies from year to year,
depending on market conditions. While short-term trading increases portfolio
turnover and may increase costs, the execution costs for municipal securities
are substantially less than for equivalent dollar values of equity securities.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The following gives more information about the risks of investing in the
fund. Please read this information together with the section "What Are
the Risks of Investing in the Fund?" in the Prospectus. More information
about the fund's investment policies and their risks is also included under
"How Does the Fund Invest Its Assets?" in both the Prospectus and this SAI.
NEW YORK RISKS. Since the fund mainly invests in New York municipal
securities, its performance is closely tied to the ability of issuers of New
York municipal securities to continue to make principal and interest payments
on their securities. The issuers' ability to do this is in turn dependent on
economic, political and other conditions within New York. Below is a
discussion of certain conditions that may affect New York issuers. It is not
a complete analysis of every material fact that may affect the ability of
issuers of New York municipal securities to meet their debt obligations or
the economic or political conditions within New York. The information below,
including the table of New York economic data, is based on publications from
Fitch (April 1998 for the state and December 1997 for New York City), Moody's
(March 1998) and S&P (December 1997), three historically reliable sources,
but the fund has not independently verified it.
NEW YORK STATE. The ability of New York issuers to continue to make principal
and interest payments is dependent in large part on the ability of the state
to raise revenues, primarily through taxes, and to control spending. Many
factors can affect the state's revenues including the rate of population
growth, unemployment rates, personal income growth, federal aid, and the
ability to attract and keep successful businesses. A number of factors can
also affect the state's spending including current debt levels, and the
existence of accumulated budget deficits. The following table provides some
information on these and other factors.
NEW YORK ECONOMIC DATA
- ------------------------------------------------------------------------------
POPULATION o 18.2 million in 1996 (third most in U.S.)
o Less than 1% growth rate (1990-1995)
o Population growth has been slower than the national
average for decades
EMPLOYMENT o Growth rate estimated at 1.4% for 1997 and 1.0% for
1998
o 6.2% unemployment rate in 1996 (v. 4.9% nationally)
o Much of the state's growth has been in the services
sector, which recently accounted for one-third of
the state's total employment. In recent years, the
strong performance of the financial sector has
been especially important to the state, accounting
for 9.1% of employment but 17% of state income.
Manufacturing employment has steadily declined,
down 5% since 1988. Overall, employment growth has
lagged the national average.
PERSONAL o Personal income growth has lagged the national rate
over the past decade, with
INCOME o most of the growth coming from the financial sector.
o $29,181 per capita in 1996 or 119% of the U.S.
average, ranking New York fourth
DEBT LEVEL o Moderate, although above average. General
obligation debt levels have been stable, while
appropriation-backed debt has increased over 200%.
o As of 1997, the state's debt was $33 billion, or
roughly $1,800 per capita, 6.1% of personal
income, and 6.6% of general fund operating
expenditures
FINANCES o Fiscal 1997 ended with a $1.9 billion surplus (on a
GAAP basis) and reduced the accumulated deficit to
about $1 billion
o The estimated fiscal 1998 budget reflects spending
increases of more than 5%, with increased spending
for education, at the same time the state has
proposed to significantly reduce taxes.
o If the state's economic performance lags, the state
may face pressures as its proposed 20% tax cut is
phased in, along with major education enhancements.
Overall, in recent years New York's budget controls have improved. The
state's relatively diverse economy has also improved, fueled by growth in
financial services and a sizable reliance on the securities industry. The
overall high cost of living and doing business in the state, however, has
been a limiting factor in the state's economic growth. In an effort to retain
and attract business to the state, the state's governor and legislature
implemented the multiyear tax reduction plan referred to in the table above.
The state has either guaranteed or supported, through lease-purchase
arrangements or other contractual or moral obligations, a substantial
principal amount of securities issued by various state agencies and
authorities. Moral obligations do not impose immediate financial obligations
on the state and require appropriations by the legislature before any
payments can be made. If the state fails to appropriate necessary amounts or
to take other action to allow authorities and agencies to meet their
obligations, the authorities and agencies could default on their debt
obligations. If a default occurs, it would likely have a significant adverse
impact on the market price of the obligations of both the state and its
various authorities and agencies.
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 or to obtain additional financing could be adversely
affected. This financial situation could result not only in defaults of state
and agency obligations, but could also adversely affect the marketability of
New York municipal securities.
In addition, if constitutional challenges to state laws or other court
actions are brought against the state or its agencies and municipalities
relating to financing, or the amount and use of taxes, these actions could
adversely affect the ability of the state and its political subdivisions to
meet their debt obligations, and may require extraordinary appropriations,
expenditure reductions, or both.
NEW YORK CITY. In 1975, New York City suffered several financial crises. In
that year, the city lost access to public credit markets and was not able to
sell short-term notes until 1979 or long-term notes until 1981. In an effort
to help the city out of its financial difficulties, the state legislature
created the Municipal Assistance Corporation ("MAC"). MAC has the authority
to issue bonds and notes and to pay or lend the proceeds to New York City, as
well as 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 or to continue appropriating per capita state aid
to pay MAC obligations. MAC does not have taxing powers, and its bonds are
not obligations enforceable against either New York City or New York state.
From 1975 until June 30, 1986, the city's financial condition was subject to
oversight and review by the New York State Financial Control Board (the
"FCB"). To be eligible for guarantees and assistance, the city was required
to submit to the FCB, at least 50 days before the beginning of each fiscal
year, a financial plan for the city and certain agencies covering the
four-year period beginning with the upcoming fiscal year. The four-year
financial plans had to show a balanced budget determined in accordance with
generally accepted accounting principles. On June 30, 1986, some of the FCB's
powers were suspended because the city had satisfied certain statutory
conditions. The powers suspended included the FCB's power to approve or
disapprove certain contracts, long-term and short-term borrowings and the
four-year financial plans. The city, however, is still required to develop
four-year financial plans each year and the FCB continues to have certain
review powers. The FCB must reimpose its full powers if there is the
occurrence or a substantial likelihood and imminence of the occurrence of any
one of certain events including the existence of an operating deficit greater
than $100 million, or failure by the city to pay principal of or interest on
any of its notes or bonds when due or payable.
In recent years, the city's overall debt burden has been high and approaching
constitutional general obligation debt limits. At the same time, the city
recently adopted a 10-year, $45 billion capital plan to maintain its
essential infrastructure. To help finance the capital plan and allow the city
to operate under its constitutional debt limit, the state's legislature
created the New York City Transitional Finance Authority in March 1997, which
is authorized to issue additional debt for the city's use. This debt will be
backed primarily by city personal income taxes. Going forward, the city will
need to somehow balance the maintenance of its infrastructure with its
growing debt burden.
On the positive side, the city ended fiscal 1997 with a record $1.3 billion
surplus. The city's financial performance has been due in large part to the
strong performance of the securities industry, which may or may not continue,
as well as strong growth in tourism. While income levels are above the
national average, employment growth in New York City is expected to lag
behind that of the nation.
Both Fitch and S&P believe that fiscal 1998 will also be a solid year for the
city. After the first quarter of fiscal 1998, revenues were exceeding
expectations. Budget gaps are expected in future years, however, and the city
will face some significant challenges due to scheduled labor cost increases
in the year 2000 and the city's already high and increasing debt service.
GENERAL. Both the state and city face potential economic and budgetary
problems that could affect their ability to meet their financial obligations.
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 control.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval 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 fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings for temporary or emergency purposes may be made in an amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a
portion of an issue of publicly distributed bonds, debentures, notes or other
debt securities, or to the extent the entry into a repurchase agreement may
be deemed a loan. Although such loans are not presently intended, this
prohibition will not preclude the fund from loaning securities to
broker-dealers or other institutional investors if at least 102% cash
collateral is pledged and maintained by the borrower; provided such security
loans may not be made if, as a result, the aggregate of such loans exceeds
10% of the value of the fund's total assets at the time of the most
recent loan.
4. Act as underwriter of securities issued by other persons except insofar
as the fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more
than 10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; retain securities of any issuer if, to the knowledge of the fund,
one or more of its officers, trustees or the manager, own beneficially more
than 1/2 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.
8. Invest in commodities and commodity contracts, "puts," "calls,"
"straddles," "spreads" or any combination thereof, or interests in oil, gas
or other mineral exploration or development programs. The fund may, however,
write covered call options listed for trading on a national securities
exchange and purchase call options to the extent necessary to cancel call
options previously written. At present there are no options listed for
trading on a national securities exchange covering the types of securities
which are appropriate for investment by the fund and, therefore, there are no
option transactions available for the fund.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; except to the
extent the fund invests its uninvested daily cash balances in shares of
Franklin New York Tax-Exempt Money Fund and other tax-exempt money market
funds in the Franklin Templeton Group of Funds provided i) its purchases and
redemptions of such money market fund shares may not be subject to any
purchase or redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge
related to the expense of distributing the fund's shares (as determined under
Rule 12b-1, as amended under the federal securities laws) and iii) provided
aggregate investments by the fund in any such money market fund do not exceed
(A) the greater of (i) 5% of the fund's total net assets or
(ii) $2.5 million, or (B) more than 3% of the outstanding shares of any such
money market fund.
11. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of assets in securities of any industry. For
purposes of this limitation,
tax-exempt securities issued by governments or political subdivisions of
governments are not considered to be part of any industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate,or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
If a percentage restriction is met at the time of
investment, a later increase or decrease in the percentage due to a change in
the value or liquidity of portfolio securities or the amount of 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 fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (crude oil and natural gas refining)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (packaged foods and allied products) (1994-present);
director or trustee, as the case may be, of 25 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
President
and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the
investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of
49 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and
Hambrecht and Quist Group (investment banking), and President, National
Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.;
President and Director, Franklin Templeton Services, Inc.; Senior Vice
President and Chief Financial Officer, Franklin/Templeton Investor Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be,
of 53 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Thomas J. Kenny (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer
and Principal
Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (59)
One North Lexington Avenue
White Plains, NY 10001-1700
Secretary
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and the manager. As of June 1, 1998, nonaffiliated members of
the Board are paid $950 per month plus $940 per meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the
Trust and by other funds in the Franklin Templeton Group of Funds.
NUMBER OF
TOTAL FEES BOARDS IN THE
TOTAL FEES RECEIVED FROM THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST** GROUP OF FUNDS*** WHICH EACH SERVES****
Harris J. Ashton $18,400 $344,642 49
S. Joseph Fortunato 18,400 361,562 51
Edith E. Holiday* 6,400 72,875 25
Gordon S. Macklin 18,400 337,292 49
*Appointed February 1, 1998.
**For the fiscal year ended May 31, 1998, during which time fees at the rate
of $800 per month plus $800 per meeting attended were in effect.
***For the calendar year ended December 31, 1997.
****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of July 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately
24,177 Class I shares, or less than 1% of the total outstanding Class I
shares of the fund. Many of the Board members also own shares in other funds
in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
During the fiscal year ended May 31, 1998, legal fees of $39,325 were paid to
the law firm of which Mr. Lorenz, an officer of the fund, is a partner, and
which acts as counsel to the fund.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. As of October 1, 1998, the fund's
investment manager is Franklin Advisers, Inc. The manager provides investment
research and portfolio management services, including the selection of
securities for the fund to buy, hold or sell and the selection of brokers
through whom the fund's portfolio transactions are executed. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager's activities are subject to the
review and supervision of the Board to whom the manager renders periodic reports
of the fund's investment activities. The manager and its officers, directors and
employees are covered by fidelity insurance for the protection of the fund. The
terms and conditions of the management services the manager provides to the fund
are the same as those of the previous manager.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by the manager on behalf of the
fund. Similarly, with respect to the fund, the manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that the manager and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. The manager is not obligated to refrain from investing in securities
held by the fund or other funds that it manages. Of course, any transactions
for the accounts of the manager and other access persons will be made in
compliance with the fund's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays the manager a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100 million; and 1/24 of 1% of the value of net
assets over $100 million and not over $250 million; and 9/240 of 1% of the
value of net assets over $250 million and not over $10 billion; and 11/300 of
1% of the value of net assets over $10 billion and not over $12.5 billion;
and 7/200 of 1% of the value of net assets over $12.5 billion and not over
$15 billion; and 1/30 of 1% of the value of net assets over $15 billion and
not over $17.5 billion; and 19/600 of 1% of the value of net assets over
$17.5 billion and not over $20 billion; and 3/100 of 1% of the value of net
assets in excess of $20 billion. The fee is computed at the close of business
on the last business day of each month. Each class pays its proportionate
share of the management fee.
For the fiscal years ended May 31, 1998, 1997 and 1996, management fees
totaling $22,245,150, $21,846,977 and $21,810,902, respectively, were paid to
the manager.
MANAGEMENT AGREEMENT. The management agreement is in effect until July 31,
1999. It may continue in effect for successive annual periods if its
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 fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to the
manager, or by the manager on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, the manager pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
During the fiscal year ended May 31, 1998, and the period October 1, 1996
through May 31, 1997, administration fees totaling $4,576,798 and $3,128,421,
respectively, were paid to FT Services. The fee is paid by the manager. It is
not a separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these services
per benefit plan participant fund account per year may not exceed the per
account fee payable by the fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended May 31, 1998, the auditor's 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 May 31, 1998.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the fund does not buy bonds in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions 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 staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended May 31, 1998, 1997 and 1996, the fund paid no
brokerage commissions.
As of May 31, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Banks and financial institutions that sell shares of the fund may be required
by state law to register as Securities Dealers. Financial institutions or
their affiliated brokers may receive an agency transaction fee in the
percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - 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%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75%
on sales of $1 million to $2 million, plus 0.60% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100
million. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the fund a signed shareholder application with the
Letter of Intent 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 on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they 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 on the amount actually purchased (less
redemptions) during the period. If you execute a Letter before a change in
the sales charge structure of the fund, you may 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 Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered
in your name until you fulfill the Letter. If the amount of your total
purchases, less redemptions, equals 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 amount of your total purchases, less
redemptions, exceeds the amount specified under the Letter and is an amount
that 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
amount of your total purchases, less redemptions, is 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 the purchases had been made at a single time. Upon 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 before 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.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term, tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue 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.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. 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 the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that 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. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
Generally, trading in U.S. government securities and money market instruments
is substantially completed each day at various times before the close of the
NYSE. The value of these securities used in computing the Net Asset Value of
each class is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values
of these securities occur during this period, the securities will be valued
at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of
the Code, the fund has qualified and continues to qualify to pay
"exempt-interest dividends" to shareholders. These dividends are derived from
interest income exempt from regular federal income tax, and are not subject
to regular federal income tax when they are distributed. In addition, to the
extent that exempt-interest dividends are derived from interest on
obligations of New York or its political subdivisions, or from interest on
qualifying U.S. territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands or Guam), they will also be exempt from
New York state and New York City personal income taxes. New York state and
New York City generally do not grant tax-free treatment to interest on state
and municipal securities of other states.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your personal tax
advisor to determine the application of your state and local laws to these
distributions. Corporate shareholders should consult with their corporate tax
advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
The fund may earn taxable income on any temporary investments, on the
discount from stripped obligations or their coupons, on income from
securities loans or other taxable transactions, on the excess of short-term
capital gains over long-term capital losses earned by the fund ("net
short-term capital gain"), or on ordinary income derived from the sale of
market discount bonds. Any distributions by the fund from such income will be
taxable to you as ordinary income, whether you take them in cash or
additional shares.
From time to time, the fund may buy a tax-exempt bond in the secondary market
for a price that is less than the principal amount of the bond. This discount
is called market discount if it exceeds a de minimis amount of discount under
the Code. For market discount bonds purchased after April 30, 1993, a portion
of the gain on sale or disposition (not to exceed the accrued portion of
market discount at the time of the sale) is treated as ordinary income rather
than capital gain. Any distribution by the fund of market discount income
will be taxable as ordinary income to you. The fund may elect in any fiscal
year not to distribute to you its taxable ordinary income and to pay a
federal income or excise tax on this income at the fund level. In any case,
the amount of market discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gains from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets, and at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund before January 1, 1998, are taxable at different
rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than five years that are sold after December 31, 2000. For individuals who
are subject to tax at higher rates, qualified 5-year gains are net gains on
securities that are purchased after December 31, 2000 and are held for more
than five years. Taxpayers subject to tax at the higher rates may also make
an election for shares held on January 1, 2001 to recognize gain on their
shares in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gain distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions about your personal tax reporting should be addressed to your
personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if
any, which are declared in October, November or December to shareholders of
record in such month, and paid to you in January of the following year, will
be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The fund will report this income
to you on your Form 1099-DIV for the year in which these distributions were
declared. You will receive a Form 1099-DIV only for calendar years in which
the fund has made a distribution to you of taxable ordinary income or capital
gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will shortly after the close of each calendar year advise you of the tax
status for federal income tax purposes of such distributions, including the
portion of the distributions that on average comprise taxable income or
interest income that is a tax preference item under the alternative minimum
tax. If you have not held fund shares for a full year, you may have
designated as taxable, tax-exempt or as a tax preference a percentage of
income that is not equal to the actual amount of such income earned during
the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its
investment company taxable income (i.e., net investment income plus net
short-term capital gains) and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending
October 31 (in addition to undistributed amounts from the prior year) to you
by December 31 of each year in order to avoid federal excise taxes. The fund
intends to declare and pay sufficient dividends in December (or in January
that are treated by you as received in December) but does not guarantee and
can give no assurances that its distributions will be sufficient to eliminate
all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your shares in the fund and any remaining
loss will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the fund for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans)
issued after August 7, 1986, while still exempt from regular federal income
tax, is a preference item for taxpayers when determining their alternative
minimum tax under the Code and under the income tax provisions of several
states. Private activity bond interest could subject you to or increase your
liability under federal and state alternative minimum taxes, depending on
your individual or corporate tax position.
Consistent with the fund's goal, 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. Persons who are defined in
the Code as "substantial users" (or persons related to such users) of
facilities financed by private activity bonds should consult with their tax
advisors before buying shares in the fund.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To
the extent the fund invests in zero coupon bonds, bonds issued or acquired at
a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its 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 fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1998, 1997 and 1996, were
$8,118,501, $9,477,540 and $13,262,121, respectively. After allowances to
dealers, Distributors retained $513,903, $605,028 and $845,729 in net
underwriting discounts and commissions and received $16,090, $51,601 and
$54,293 in connection with redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under the
Rule 12b-1 plan for each class, as discussed below. Except as noted,
Distributors received no other compensation from the fund for acting as
underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.10% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
Class I shares of the fund that were acquired by investors on or after May 1,
1994, 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 the fund that were acquired before May 1, 1994 ("Old
Assets"). These 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 0.01% will be paid to
Distributors under the plan, or should the fund's assets fall below $4
billion up to an additional 0.02% could be paid to Distributors under the
plan. The payments 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. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.06% (0.05% plus 0.01%)
of the average daily net assets of Class I and, as Class I shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
plan will also increase (but will not exceed 0.10% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class I plan, the plan permits the Board to allow the 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.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.50% per year of Class II's average daily net assets, 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 distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
fund.
Under the Class II plan, the fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the fund, the manager or Distributors or other parties on behalf
of the fund, the manager or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of each plan 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 each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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. These 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 these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. The Class I plan
may also be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. 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 outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the Board, 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 May 31, 1998, Distributors had eligible
expenditures of $4,194,856 and $783,840 for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class I and Class
II plans, respectively, of which the fund paid Distributors $3,404,257 and
$570,821 under the Class I and Class II plans.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended May 31, 1998, was 5.14%, 5.47% and 7.93%, respectively. The
average annual total return for Class II for the one-year period ended May
31, 1998, and for the period from inception (May 1, 1995) through May 31,
1998, was 7.10% and 6.91%, respectively.
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 each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-, five- and ten-year periods ended May 31, 1998, was 5.14%, 30.53%
and 114.40%, respectively. The cumulative total return for Class II for the
one-year period ended May 31, 1998, and for the period from inception (May 1,
1995) through May 31, 1998, was 7.10% and 22.88%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by the fund. It is calculated by dividing the net investment income per share
of each class earned during a 30-day base period by the applicable maximum
Offering Price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the class during the base period. The yield for each class
for the 30-day period ended May 31, 1998, was 4.48% for Class I and 4.07% for
Class II.
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
TAXABLE-EQUIVALENT YIELD. The fund may also quote a taxable-equivalent yield
for each class that shows the before-tax yield that would have to be earned
from a taxable investment to equal the yield for the class.
Taxable-equivalent yield is computed by dividing the portion of the class'
yield that is tax-exempt by one minus the highest applicable combined
federal, state and city income tax rate and adding the product to the portion
of the class' yield that is not tax-exempt, if any. The taxable-equivalent
yield for each class for the 30-day period ended May 31, 1998, was 8.36% for
Class I and 7.60% for Class II.
As of May 31, 1998, the combined federal, state and city income tax rate upon
which the taxable-equivalent yield quotations are based was 46.4%. From time to
time, as any changes to the rates become effective, taxable-equivalent yield
quotations advertised by the fund will be updated to reflect these changes. The
fund expects updates may be necessary as tax rates are changed by federal, state
and local governments. The advantage of tax-free investments, like the fund,
will be enhanced by any tax rate increases. Therefore, the details of specific
tax increases may be used in sales material for the fund.
CURRENT DISTRIBUTION RATE
Current yield and taxable-equivalent yield, which are calculated according to
a formula prescribed by the SEC, are not indicative of the amounts which were
or will be paid to shareholders. Amounts paid to shareholders are reflected
in the quoted current distribution rate or taxable-equivalent distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include
distributions to shareholders from sources other than interest, if any, and
is calculated over a different period of time. The current distribution rate
for each class for the 30-day period ended May 31, 1998, was 5.23% for Class
I and 4.83% for Class II.
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal,
state and city tax rates available to the fund. The taxable-equivalent
distribution rate for each class for the 30-day period ended May 31, 1998,
was 9.76% for Class I and 9.02% for Class II.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative 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.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) IBC Money Fund Report(R) - industry averages for seven-day annualized and
compounded yields of taxable, tax-free and government money funds.
d) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
e) Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
g) Bond Buyer's Municipal Bond Index - an index based on the yields of 40
long-term, tax-exempt municipal bonds, and designed to be the basis for the
Municipal Bond Index futures contract.
h) Bond Buyer's 40 Average Dollar Price - a simple average of the current
average dollar bid prices of the 40 bonds in the Bond Buyer's Municipal Bond
Index.
i) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for mutual funds.
j) Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
k) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
n) 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.
From time to time, advertisements or information for the fund may include a
discussion of certain
attributes or benefits to be derived from an investment in the fund. The
advertisements or information may include symbols, headlines, or other
material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or sales material issued by the fund may also discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. 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 that 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. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not
insured by any federal, state or private entity.
In assessing 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 fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The 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
other long-term goals. The Franklin College Costs Planner may help 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 the fund cannot guarantee that these goals will be met.
The 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 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. 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 $49 billion in municipal bond assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
June 30, 1998.
According to the April 30, 1998, report published by Strategic Insight, the
fund is the largest New York municipal bond fund.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1998, taxes could cost almost $47
on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 1998).
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 the fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers 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.
From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended May 31, 1998, including
the auditor's report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
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.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund dated May 31, 1998, which we may
amend from time
to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
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 that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
BA: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
CON.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals that
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
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 a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default and payment of
interest and/or repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD AND D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery while D represents the lowest potential for recovery. Plus (+) or
minus (-) signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus or minus signs are not
used with the AAA, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing; factors of the first importance in
long-term borrowing risk are of lesser importance in the short run. Symbols
used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all
security elements accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in particular, is likely to
be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a
satisfactory capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal
paper investments permitted to be made by the fund, 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.
The relative degree of safety, however, is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, CDs, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic
conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
