o 115 P-1
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
FRANKLIN NEW YORK TAX-FREE INCOME FUND
DATED OCTOBER 1, 1999
The prospectus is amended as follows:
I. The following sentence is added after the minimum investments table on page
21:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
II. The management team on page 10 is replaced with the following:
The team responsible for the fund's management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the fund since
1987. She is the co-Director of Franklin's Municipal Bond Department. She
joined the Franklin Templeton Group in 1986.
MARK ORSI, VICE PRESIDENT OF ADVISERS
Mr. Orsi has been an analyst or portfolio manager of the fund since 1991.
He joined the Franklin Templeton Group in 1990.
BERNARD SCHROER, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Schroer has been an analyst or portfolio manager of the fund since
1987. He joined the Franklin Templeton Group in 1987.
III. The section "Sales charge waivers" on page 20 is replaced with the
following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class may be waived for certain redemptions and distributions. If you would
like information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. A list of
available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
IV. The section "Dealer compensation" on page 30 is replaced with the following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
Class A Class B Class C
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Commission (%) - 3.00 2.00
Investment under $100,000 4.00 - -
$100,000 but under $250,000 3.25 - -
$250,000 but under $500,000 2.25 - -
$500,000 but under $1 million 1.85 - -
$1 million or more up to 0.75 1 - -
12b-1 fee to dealer 0.10 0.15 2 0.65 3
A dealer commission of up to 1% may be paid on Class C NAV purchases. A dealer
commission of up to 0.25% may be paid on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental authorities,
and broker-dealers or others on behalf of clients participating in
comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year
after purchase and may be eligibleto receive the full 12b-1 fee starting in
the 13th month.
V. The section "Statements and reports" on page 28 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund
expenses, we try to identify related shareholders in a household and send only
one copy of the financial reports. If you need additional copies, please call
1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
Please keep this supplement for future reference.
FRANKLIN
NEW YORK TAX-FREE
INCOME FUND
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999, AS AMENDED JANUARY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 99715, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated October 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended May 31, 1999, are incorporated
by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies ........................... 2
Risks ......................................... 6
Officers and Trustees ......................... 8
Management and Other Services ................. 10
Portfolio Transactions ........................ 11
Distributions and Taxes ....................... 12
Organization, Voting Rights
and Principal Holders ........................ 13
Buying and Selling Shares ..................... 14
Pricing Shares ................................ 19
The Underwriter ............................... 20
Performance ................................... 21
Miscellaneous Information ..................... 24
Description of Ratings ........................ 25
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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.
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115 SAI 01/00
GOAL AND STRATEGIES
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The fund's investment goal 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 it may not be
changed without shareholder approval. Of course, there is no assurance that the
fund will meet its goal.
As a fundamental policy, the fund normally invests at least 80% of its total
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax. As nonfundamental policies,
the fund also normally invests at least 65% of its total assets in securities
that pay interest free from New York state and New York City personal income
taxes, and at least 65% of its total assets in New York municipal securities.
Municipal securities issued by New York or its counties, municipalities,
authorities, agencies, or other subdivisions, as well as municipal securities
issued by U.S. territories such as Guam, Puerto Rico, the Mariana Islands or
the U.S. Virgin Islands, generally pay interest free from federal income tax
and from New York state and New York City personal income taxes for New York
residents.
The fund tries to invest all of its assets in municipal securities whose
interest is free from regular federal and New York state and New York City
personal income taxes. 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
also may 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.
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. While this feature helps protect against a decline in the security's
market price when interest rates rise, it lowers the fund's income when
interest rates fall. Of course, the fund's income from its variable rate
investments also may increase if interest rates rise.
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 one to 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. The fund generally uses
variable or floating rate securities as short-term investments while waiting
for long-term investment opportunities.
MUNICIPAL LEASE OBLIGATIONS The fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally 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
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, 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.
The board of trustees reviews the fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board.
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.
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 may receive
a small additional payment as a call premium. The manager may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
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. A call of some or all of these securities may lower the fund's
income, its yield and its distributions to shareholders. 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.
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.
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.
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 does not
believe its net asset value or income will 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 generally will 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.
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 this purpose, 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. Escrow-secured or defeased
bonds generally are not considered an obligation of the original municipality
when determining diversification. Nonetheless, the fund may not invest more
than 25% of its total assets in defeased bonds of the same municipal issuer.
For securities backed only by the assets or revenues of a particular
instrumentality, facility or subdivision, the entity is considered the issuer.
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.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, including the
unavailability of securities that meet the fund's investment criteria, 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) 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; (ii) securities issued by or guaranteed by
the full faith and credit of the U.S. government; or (iii) municipal
securities issued by a state or local government other than New York. The
fund also may invest all of its assets in municipal securities issued by a
U.S. territory such as Guam, Puerto Rico, the Mariana Islands or the U.S.
Virgin Islands.
SECURITIES TRANSACTIONS The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for the fund 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.
CREDIT 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 Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (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, and a descending numerical scale to rate short-term securities.
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 at the end of this SAI under "Description of
Ratings."
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 guarantees 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.
As discussed in the prospectus, the fund has limitations on the credit
quality of the securities it may buy.
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. 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.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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
the its officers, trustees, or the manager, own beneficially more than one-half
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
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)
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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus 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. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
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NEW YORK 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 municipal 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 and is subject to change. The information
below is based on data available to the fund from historically reliable sources,
but the fund has not independently verified it.
NEW YORK STATE. The ability of New York's issuers to continue to make
principal and interest payments is dependent in large part on their ability
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 the need for infrastructure
improvements, increased costs for education and other services, current debt
levels, and the existence of accumulated budget deficits.
In recent years, New York's economy has improved, in large part due to strong
growth in the state's financial services sector. Nonetheless, the state's
population, employment and personal income growth rates have continued to lag
national growth rates and the state has been unable to restore employment to
its pre-recession level.
With its improved economic performance, the state also has been able to improve
its finances. New York has had three consecutive years of budget surpluses and
has eliminated its accumulated GAAP general fund deficit. For fiscal 1997 and
1998, the state's surpluses totaled $1.4 billion and $2.0 billion, respectively.
As of June 1999, a cash surplus of more than $1 billion was estimated for fiscal
1999. Going forward, however, recent estimates have shown a budget gap of nearly
$3.9 billion by fiscal 2002, due to the continued implementation of revenue
reducing tax cuts along with increased spending (about 7% in 1999). This gap
could widen if the recent strong performance of Wall Street and the state's
overall financial services sector does not continue.
New York's debt burden has continued to be one of the highest among the states.
As of August 1998, New York ranked fourth with a debt per capita of $1,914. As
of June 1999, the state's proposed capital plan recommended reducing the state's
reliance on debt issuance and increasing the use of "pay-as-you-go" financing.
Despite recent improvements in New York's economic and financial performance,
its high debt levels and projected budget imbalances leave the state vulnerable
to an economic slowdown and volatility in its financial services sector.
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 (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 has
approached 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. For fiscal 1999, debt service costs have been estimated
at approximately 9.1% of the city's expenditures. This figure may grow to
11.4% by 2002 and could reduce the city's future financial flexibility,
especially in the event of an economic downturn or other financial crisis.
On the positive side, the city ended fiscal 1998 with a surplus of more than
$2 billion. As of June 1999, positive results were also expected for fiscal
1999. Similar to improvements at the state level, the city's improved
financial performance has been due in large part to the strong performance of
the securities industry and overall financial services sector, which may or
may not continue. Despite improved economic performance, the city's
employment growth has remained below national levels.
U.S. TERRITORIES Since the fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories, the ability of municipal
issuers in U.S. territories to continue to make principal and interest
payments also may affect the fund's performance. As with New York municipal
issuers, the ability to make these payments is dependent on economic,
political and other conditions. Below is a discussion of certain conditions
within some of the territories where the fund may invest. It is not a
complete analysis of every material fact that may affect the ability of
issuers of U.S. territory municipal securities to meet their debt obligations
or the economic or political conditions within the territories and is subject
to change. It is based on data available to the fund from historically
reliable sources, but it has not been independently verified by the fund.
GUAM. Guam's economy has been heavily dependent on tourism. It has been
especially dependent on Japanese tourism, which has made Guam vulnerable to
fluctuations in the relationship between the U.S. dollar and the Japanese
yen. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.8% in gross island product between
1997 and 1998.
In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a
comprehensive financial plan in June 1995 to help balance the budget and
reduce the general fund deficit by fiscal 1999. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
While Guam's debt burden has been manageable, Guam's ability to maintain
current debt levels may be challenged in the near future. U.S. military
downsizing has reduced the federal presence on the island and also may reduce
federal support for infrastructure projects. At the same time, Guam has faced
increasing pressure to improve its infrastructure to help generate economic
development.
Overall, as of May 20, 1999, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and inability to meet the goals of the
financial plan.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico also will need to address its large
unfunded pension liability of more than $6 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Internal Revenue Code. This section has given certain U.S. corporations
operating in Puerto Rico significant tax advantages. These incentives have
helped considerably with Puerto Rico's economic growth, especially with the
development of its manufacturing sector. U.S. firms that have benefited from
these incentives have provided a significant portion of Puerto Rico's
revenues, employment and deposits in local financial institutions. The
section 936 incentives will be phased out over a 10-year period ending in
2006. It is hoped that this long phase-out period will give Puerto Rico
sufficient time to lessen the potentially negative effects of section 936's
elimination. Outstanding issues relating to the potential for a transition to
statehood also may have broad implications for Puerto Rico and its financial
and credit position.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 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) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 24 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 (66)
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 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 49 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; 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 52 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 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 (54)
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 Investment Advisory
Services, Inc. and 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 52 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer 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, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton 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 52 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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, LLC and Franklin Mutual Advisers, LLC;
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 (36)
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 (60)
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 (60)
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.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $950 per month plus $940 per meeting
attended. Noninterested board members also may serve as directors or trustees of
other funds in the Franklin Templeton Group of Funds and may receive fees from
these funds for their services. The fees payable to noninterested board members
by the trust are subject to reductions resulting from fee caps limiting the
amount of fees payable to board members who serve on other boards within the
Franklin Templeton Group of Funds. The following table provides the total fees
paid to noninterested board members by the trust and by the Franklin Templeton
Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
- --------------------------------------------------------------------------------
Harris J. Ashton 17,299 361,157 48
S. Joseph Fortunato 16,114 367,835 50
Edith E. Holiday 21,740 211,400 24
Gordon S. Macklin 17,299 361,157 48
1. For the fiscal year ended May 31, 1999.
2. For the calendar year ended December 31, 1998.
3. 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 161 U.S. based
funds or series.
Noninterested board members 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
During the fiscal year ended May 31, 1999, legal fees of $25,500 were paid to
the law firm of which Mr. Lorenz, an officer of the trust, is the partner, and
which acts as counsel to the trust.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the fund's portfolio transactions. The manager provides periodic reports
to the board, which reviews and supervises the manager's investment activities.
To protect the fund, the manager and its officers, directors and employees are
covered by fidelity insurance.
The manager and its affiliates manage 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 applicable federal securities laws, 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 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.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million; and
o 1/24 of 1% of the value of net assets over $100 million and not over $250
million; and
o 9/240 of 1% of the value of net assets over $250 million and not over $10
billion; and
o 11/300 of 1% of the value of net assets over $10 billion and not over $12.5
billion; and
o 7/200 of 1% of the value of net assets over $12.5 billion and not over $15
billion; and
o 1/30 of 1% of the value of net assets over $15 billion and not over $17.5
billion; and
o 19/600 of 1% of the value of net assets over $17.5 billion and not over $20
billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended May 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- --------------------------------------------------------------
1999 22,815,525
1998 22,245,150
1997 21,846,977
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended May 31, the manager paid FT Services
the following administration fees:
ADMINISTRATION
FEES PAID ($)
- --------------------------------------------------------------
1999 4,325,628
1998 4,231,884
19971 2,780,918
1. For the period from October 1, 1996, through May 31, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
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
securities 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 allows 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, also may 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 last three fiscal years ended May 31, 1999, 1998 and 1997, the fund
did not pay brokerage commissions.
As of May 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of interest on its investments. This income, less expenses incurred in the
operation of the fund, constitutes the fund's net investment income from which
dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code, the fund has
qualified and continues to qualify to pay exempt-interest dividends to you.
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 to you. 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 also may be exempt from New York's personal income taxes. New York
generally does not grant tax-free treatment to interest on state and municipal
securities of other states.
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, or on ordinary income derived from the sale of
market discount bonds. Any fund distributions from such income will be taxable
to you as ordinary income, whether you receive them in cash or in additional
shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year, 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, the fund may designate and distribute
to you, as taxable, tax-exempt or tax preference income, 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.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. 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 or
short-term, generally depending on how long you hold your shares. 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 fund shares 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 If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded 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 generally will 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.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses. In turn, these
rules may affect the amount, timing or character of the income distributed to
you by the fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Internal
Revenue 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. Persons who are defined in the Internal Revenue 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 fund
shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The fund is a series of Franklin New York Tax-Free Income Fund, an open-end
management investment company, commonly called a mutual fund. The fund 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 currently offers three classes of shares, Class A, Class B, and Class
C. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999. The fund may offer additional classes of shares in the future.
The full title of each class is:
o Franklin New York Tax-Free Income Fund - Class A
o Franklin New York Tax-Free Income Fund - Class B
o Franklin New York Tax-Free Income Fund - Class C
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its discretion.
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.
As of July 7, 1999, the officers and board members, as a group, owned of record
and beneficially less than 1% of the outstanding shares of each class. The board
members may own shares in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., 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.
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. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A and
1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI
have been completed.
If the terms of your LOI are met, 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, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards 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 in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o 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.
o 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 CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously 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.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
SALES IN TAIWAN. 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.
The fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin Templeton Group of Funds.
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 rules of the National Association of Securities Dealers,
Inc.
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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
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1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
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, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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.
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. 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. 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 also may be
subject to a CDSC.
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.
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. 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.
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 U.S. Securities and Exchange
Commission (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. Redemptions in kind are taxable transactions.
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.
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.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. 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 or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued. The fund values
over-the-counter portfolio securities within the range of the most recent quoted
bid and ask prices. If portfolio securities trade both in the over-the-counter
market and on a stock exchange, the fund values them 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 NAV 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 NAV. 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.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended May 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- --------------------------------------------------------------------------------
1999 8,455,439 533,482 139,155
1998 8,118,501 513,903 16,090
1997 9,477,540 605,028 51,601
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may 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.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.10% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have incurred
them.
In implementing the Class A 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 the fund's
Class A shares 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 the fund's
Class A shares 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 A expense. This means that all Class A 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 A and, as Class A shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class A shares
purchased on or after May 1, 1994, increases in relation to outstanding Class A
shares, the expenses attributable to payments under the plan also will 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 A 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 A plan.
THE CLASS B AND C PLANS. Under the Class B and C plans, the fund pays
Distributors up to 0.50% per year of the class's average daily net assets,
payable monthly for Class B and quarterly for Class C, to pay Distributors or
others for providing distribution and related services and bearing certain
expenses. All distribution expenses over this amount will be borne by those who
have incurred them. The fund also may pay a servicing fee of up to 0.15% per
year of the class's average daily net assets, payable monthly for Class B and
quarterly for Class C. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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 fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, 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 National Association of Securities Dealers, Inc.
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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 A plan also
may be terminated by any act that constitutes an assignment of the underwriting
agreement with Distributors. Distributors or any dealer or other firm also may
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 noninterested board
members, 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, 1999, Distributors' eligible expenditures for
advertising, printing, payments to underwriters and broker-dealers and other
expenses pursuant to the plans and the amounts the fund paid Distributors under
the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- -------------------------------------------------------------------
Class A 4,599,720 3,714,710
Class B1 372,059 14,506
Class C 1,141,038 808,319
1. For the period from January 1, 1999, through May 31, 1999.
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.
Performance figures reflect Rule 12b-1 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge reflected
in each quotation is a one time fee charged on all direct purchases, which will
have its greatest impact during the early stages of your investment. This charge
will affect actual performance less the longer you retain your investment in the
fund. The average annual total returns for the indicated periods ended May 31,
1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- -------------------------------------------------------------------------------
Class A 0.25 5.75 7.08
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
- -------------------------------------------------------------------------------
Class C 2.20 6.25
The following SEC formula was used to calculate these figures:
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 initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 returns for the indicated periods ended May 31, 1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- -------------------------------------------------------------------------------
Class A 0.25 32.24 98.26
SINCE
INCEPTION
(1/1/99) (%)
- --------------------------------------------------------------------------------
Class B -3.33
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
- -------------------------------------------------------------------------------
Class C 2.20 28.08
Current yield Current yield shows the income per share earned by the fund. It is
calculated by dividing the net investment income per share 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 yields for the 30-day period ended May 31, 1999 were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------------------------------------------
4.03 3.66 3.61
The following SEC formula was used to calculate these figures:
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 also may quote a taxable-equivalent yield that
shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by dividing
the portion of the 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 yield that is not tax-exempt, if any. The taxable-equivalent
yields for the 30-day period ended May 31, 1999 were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------------------------------------------
7.43 6.75 6.66
As of May 31, 1999, the combined federal, state and city income tax rate upon
which the taxable-equivalent yield quotations were based was 45.8%. From time to
time, as any changes to the rate 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 city 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
rates for the 30-day period ended May 31, 1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------------------------------------------
5.06 4.84 4.66
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day period ended May 31, 1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------------------------------------------
9.33 8.92 8.65
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 also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance 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. Franklin Resources, Inc. 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 also may 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o 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.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o 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.
o 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.
o 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.
o 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.
o IBC Money Fund Report(R) - industry averages for seven-day annualized and
compounded yields of taxable, tax-free and government money funds.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for mutual funds.
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 also may discuss or be based
upon information in a recent issue of the Special Report on Tax Freedom Day
published by the Tax Foundation, a Washington, D.C. based nonprofit research and
public education organization. The report illustrates, among other things, the
annual amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (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 fall.
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 is one of the oldest mutual fund organizations and now services more
than 4 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 $225 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 110 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 $49
billion in municipal security 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
14, 1999.
According to the July 31, 1999, 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 1999, 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 1999). 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 also may 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 municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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 INVESTORS SERVICE, INC. (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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, 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 for both short-term debt and commercial
paper, 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, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect 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.
