FRANKLIN
TAX-EXEMPT
MONEY FUND
PROSPECTUS December 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Tax-Exempt Money Fund (the "Fund") is a no-load, open-end, diversified
management investment company offering banks, corporations, other institutions
and individual investors a convenient way to invest in a diversified,
professionally managed portfolio of high quality short-term municipal
obligations. The Fund seeks to achieve:
* HIGH CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAXES * LIQUIDITY
* CAPITAL PRESERVATION
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the Fund, dated
December 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to you. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors") at the address or telephone number shown
above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CONTENTS PAGE
Expense Table........................... 2
Financial Highlights - How Has the Fund
Performed?............................. 3
What Is the Franklin Tax-Exempt
Money Fund?............................ 4
How Does the Fund Invest Its Assets?.... 4
Who Manages the Fund?................... 7
What Distributions Might I Receive From
the Fund?.............................. 8
How Taxation Affects You and the Fund... 9
How Do I Buy Shares?.................... 10
How Do I Sell Shares?................... 12
What Programs and Privileges are Available
to Me as a Shareholder?................ 16
What If My Investment Outlook Changes? -
Exchange Privilege..................... 18
Telephone Transactions.................. 20
How Are Fund Shares Valued?............. 20
How Do I Get More Information
About My Investment?................... 21
How Does the Fund Measure Performance?.. 22
General Information..................... 22
Registering Your Account................ 23
Important Notice Regarding
Taxpayer IRS Certifications............ 24
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on aggregate operating expenses
of the Fund, before fee waivers and expense reductions, for the fiscal year
ended July 31, 1995.
SHAREHOLDER TRANSACTION EXPENSES
Exchange Fee (per transaction)........................................ $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees....................................................... 0.56%**
Other Expenses:
Shareholder Servicing Costs................................... 0.12%
Reports to Shareholders....................................... 0.07%
Other.......................................................... 0.08%
Total Other Expenses.............................................. 0.27%
Total Fund Operating Expenses..................................... 0.83%**
*$5.00 fee is imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The investment manager has agreed in advance to limit its management fees and
to make payments to reduce expenses of the Fund. With this reduction, management
fees and total operating expenses represented 0.38% and 0.65%, respectively, of
the average net assets of the Fund. This arrangement may be terminated by the
investment manager at any time.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather
the table is provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses
that apply to a $1,000 investment in the Fund over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of each time
period.
1 year 3 years 5 years 10 years
$8 $26 $46 $103
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE THE FEE
WAIVER AND EXPENSE REDUCTION, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by you
as a result of your investment in the Fund. In addition, federal securities
regulations require the example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
capital stock of the Fund throughout the ten fiscal years in the period ended
July 31, 1995. The information for each of the five fiscal years in the period
ended July 31, 1995 has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the financial statements in the Fund's
Annual Report to Shareholders dated July 31, 1995. The remaining figures, which
are also audited, are not covered by the auditors' current report. See the
discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year ....... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------
Net investment income .... 0.029 0.020 0.021 0.031 0.045 0.056 0.056 0.047 0.041 0.049
Distributions from net
investment income ....... (0.029) (.020) (.021) (.031) (.045) (.056) (.056) (.047) (.041) (.049)
-----------------------------------------------------------------------------------------------
Net asset value at
end of year ............. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------
Total return** ........... 2.98% 1.85% 2.08% 3.14% 4.65% 5.81% 5.77% 4.80% 4.20% 4.97%
Ratios/Supplemental Data
Net asset value at end
of year (in 000's) ...... $173,123 $202,883 $193,565 $207,374 $249,214 $228,001 $188,727 $214,090 $182,018 $130,125
Ratio of expenses to
average net assets ...... 0.65%+ 0.65%+ 0.69%+ 0.70%+ 0.70%+ 0.74% 0.74% 0.71% 0.74% 0.80%
Ratio of net investment in-
come to average net assets 2.65% 1.84% 2.10% 3.15% 4.53% 5.60% 5.67% 4.66% 4.22% 4.79%
*Selected data for a share of capital stock outstanding throughout the year.
**Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends at net asset value. During the
periods indicated, the investment manager agreed in advance to waive a portion
of its management fees and to reduce expenses of the Fund. Without this fee
reduction by the investment manager, the ratio of operating expenses to average
net assets for fiscal years ended 1991, 1992, 1993, 1994, and 1995 would have
been .71%, .75%, .80%, .81%, and .83% respectively.
</TABLE>
What Is the Franklin Tax-Exempt Money Fund?
The Fund is a diversified, open-end management investment company commonly
called a "mutual fund." The Fund was organized as a California corporation on
March 18, 1980 and is registered with the SEC under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Fund has only one class of capital
shares.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"What Programs and Privileges Are Available to Me as a Shareholder? - Rights of
Accumulation," currently offer their shares in two "classes" designated "Class
I" and "Class II." Classes of shares represent proportionate interests in the
same portfolio of investment securities but with different rights, privileges
and attributes. Shares of the Fund may be considered Class I shares for purposes
of the programs and privileges discussed in this Prospectus.
The Fund attempts to maintain a stable net asset value of $1.00 per share,
although there is no assurance that this will be achieved. Although you may
write redemption drafts (similar to checks) against your account, the purchase
of shares of the Fund does not create a checking or other bank account.
You may purchase shares of the Fund at net asset value (without a sales charge)
with an initial investment of at least $500 and subsequent investments of $25 or
more. (See "How Do I Buy Shares?")
How Does the Fund Invest Its Assets?
The investment objective of the Fund is to attain the highest level of current
income that is exempt from federal income taxes, consistent with liquidity and
the preservation of capital. The investment objective is a fundamental policy of
the Fund and may not be changed without shareholder approval.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Fund limits its investments to those U.S. dollar denominated instruments
which the Fund's Board of Directors determines present minimal credit risks and
which are, as required by the federal securities laws, rated in one of the two
highest rating categories as determined by nationally recognized securities
rating agencies ("NRSROs"), or which are unrated by any NRSRO but of comparable
quality, with remaining maturities of 397 calendar days or less ("Eligible
Securities"). The Fund maintains a dollar weighted average maturity of the
securities in its portfolio of 90 days or less. These procedures are not
fundamental policies of the Fund.
See the SAI for a description of ratings by three NRSROs, Standard and Poor's
Corporation, Moody's Investors Service and Fitch Investor Services, Inc.
The Fund seeks to achieve its objective by investing in a diversified portfolio
of municipal securities which the investment manager, under supervision of the
Board of Directors of the Fund, has determined present minimal credit risks.
These securities will be high-quality, short-term debt obligations which are
issued by states, territories and possessions of the United States, the District
of Columbia, and by their political subdivisions, and duly constituted
authorities, the interest from which is wholly exempt from federal income tax in
the opinion of bond counsel to the issuer. Such securities are generally known
as "Municipal Bonds" or "Municipal Notes." As with any other investment, there
is no assurance that the Fund's objective will be attained.
Where market conditions would cause a serious erosion of portfolio value due to
rapidly rising interest rates or other adverse factors, the Fund may take a
defensive position to preserve net asset value by temporarily investing a
substantial portion of its assets in short-term taxable obligations of the same
type referred to in the preceding paragraph.
Because the Fund limits its investments to high quality securities, the Fund's
portfolio will generally earn lower yields than if the Fund purchased securities
with a lower rating and correspondingly greater risk and the yield to
shareholders in the Fund is accordingly likely to be lower.
The Fund has adopted a fundamental policy which requires that, under normal
conditions, at least 80% of its assets will be invested in obligations, the
income on which will be both exempt from regular federal income tax and not
specifically treated as a tax preference item under the federal alternative
minimum tax.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject you to, or increase liability under, the federal and state alternative
minimum taxes, depending upon your tax situation. In addition, all distributions
derived from interest exempt from regular federal income tax may subject a
corporate shareholder to, or increase liability under, the federal alternative
minimum tax, because such distributions are included in the corporation's
"adjusted current earnings." In states with a corporate franchise tax,
distributions of the Fund may also be fully taxable to a corporate shareholder
under the state franchise tax system.
Consistent with the Fund's investment objective, the Fund may acquire private
activity bonds if, in the investment manager's opinion, these bonds represent
the most attractive investment opportunity then available to the Fund. As of
July 31, 1995, the Fund derived 5.68% of its income from bonds, the interest on
which constitutes a preference item subject to the federal alternative minimum
tax for certain investors.
The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at prevailing market rates. The Fund may also purchase
variable or floating rate demand notes ("VRDNs"). VRDNs are tax-exempt
obligations which contain a floating or variable interest rate and a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest according to its terms upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to such instrument. Although it is not a put option in the usual sense, such a
demand feature is sometimes known as a "put". With respect to 75% of the total
value of the Fund's assets, no more than 5% of such value may be in securities
underlying puts from the same institution.
The Fund may invest in floating rate and variable rate obligations carrying
stated maturities in excess of one year at the date of purchase by the Fund if
such obligations carry demand features that comply with rules adopted by the
SEC. The Fund will limit its purchase of municipal securities that are floating
rate and variable rate obligations to those meeting the quality standards set
forth above. Frequently such obligations are secured by letters of credit or
other credit support arrangements provided by banks. The quality of the
underlying creditor or of the bank, as the case may be, must, as determined by
the investment manager under the supervision of the Board of Directors, also be
equivalent to the quality standards set forth above. In addition, the investment
manager monitors the earning power, cash flow and other liquidity ratios of the
issuers of such obligations, as well as the creditworthiness of the institution
responsible for paying the principal amount of the obligations under the demand
feature.
The Fund may invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. A COP is created when long-term lease revenue
bonds are issued by a governmental corporation to pay for the acquisition of
property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. This lease format is generally not subject to constitutional limitations
on the issuance of state debt, and COPs enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the two highest rating categories of the NRSROs or in COPs unrated
by any NRSRO but believed to be of comparable quality. Criteria considered by
the rating agencies and the investment manager in assessing such risk include
the issuing municipality's credit rating, evaluation of how essential the leased
property is to the municipality and the term of the lease compared to the useful
life of the leased property. Such factors include (a) the credit quality of such
securities and the extent to which they are rated or, if unrated, comply with
existing criteria and procedures followed to ensure that they are of comparable
quality to the ratings required for the Fund's investment, including an
assessment of the likelihood that the leases will not be canceled; (b) the size
of the municipal securities market, both in general and with respect to COPs;
and (c) the extent to which the type of COPs held by the Fund trade on the same
basis and with the same degree of dealer participation as other municipal bonds
of comparable credit rating or quality. While there is no limit as to the amount
of assets which the Fund may invest in COPs, as of July 31, 1995, the Fund held
2.43% of the total face amount of the securities in its portfolio in COPs and
other municipal leases.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of its purchase commitments until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may borrow from banks for temporary or emergency purposes only and
pledge up to 10% of its total assets for these loans. No new investments will be
made by the Fund while any outstanding loans exceed 5% of its total assets. The
Fund may also make loans of its portfolio securities not in excess of 10% of the
value of its total assets. The Fund may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System; however, it has no present intention
of doing so. For further information on this investment technique, please see
"How Does the Fund Invest Its Assets? - Description of Municipal and Other
Securities" in the SAI.
Who Manages the Fund?
The Board of Directors (the "Board") has the primary responsibility for the
overall management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion, approximately
$41 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended July 31, 1995, management fees, before any advance
waiver, totaled 0.56% of the average daily net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
0.83% of the average daily net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the Fund paid management fees and operating expenses
totaling 0.38% and 0.65%, respectively of the average daily net assets of the
Fund.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) or its officers, directors or employees or officers and directors of
the Fund are prohibited from investing in securities held by the Fund or other
funds which it manages or administers to the extent such transactions comply
with the Fund's Code of Ethics. Please refer to the SAI for more information on
securities transactions and a summary of the Fund's Code of Ethics.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because short-term money market instruments are generally traded in
principal transactions that involve the receipt by the broker of a spread
between the bid and ask prices for the securities, and not the receipt of
commissions. In the event the Fund does participate in transactions involving
brokerage commissions, it is the Manager's responsibility to select brokers
through whom such transactions will be effected. The Manager would try to obtain
the best execution on all such transactions. If it is felt that more than one
broker would be able to provide the best execution, the Manager will consider
the furnishing of quotations and of other market services, research, statistical
and other data for the Manager and its affiliates, as well as the sale of shares
of the Fund, as factors in selecting a broker. Further information is included
under "How Does the Fund Purchase Securities for Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
What Distributions Might
I Receive From the Fund?
The Fund declares dividends each day that the Fund's net asset value is
calculated, payable to shareholders of record as of the close of business the
preceding day. The amount of dividends may fluctuate from day to day and
dividends may be omitted on some days, depending on changes in the factors that
comprise the Fund's net investment income. The Fund does not pay "interest" to
its shareholders, nor is any amount of dividends or return guaranteed in any
way.
The daily dividend includes accrued interest and any original issue and market
discount, plus or minus any gain or loss on the sale of portfolio securities and
changes in unrealized appreciation or depreciation in portfolio securities (to
the extent required to maintain a stable net asset value per share) less
amortization of any premium paid on the purchase of portfolio securities and the
estimated expenses of the Fund. Daily allocation of net investment income will
begin on the day after the Fund receives your money or settlement of a wire
order trade and will continue to accrue until the business day following receipt
of your redemption request or the settlement of a wire order trade.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund at net asset value by reinvesting dividend distributions. This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase Class I shares of another Franklin Templeton Fund
(without a sales charge or imposition of a contingent deferred sales charge).
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may choose to receive dividends in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to send the money to a checking account, please see
"Electronic Fund Transfers" under "What Programs and Privileges Are Available to
Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. Unless otherwise specified, your
dividends will automatically be reinvested daily in additional Fund shares at
the net asset value per share at the close of business each day. You may change
the distribution option selected at any time by notifying the Fund by mail or by
telephone. Please allow at least seven days for the Fund to process the new
option.
The SAI includes a further discussion of distributions.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, the Fund will continue to qualify
to pay exempt-interest dividends to its shareholders. Such exempt-interest
dividends are derived from interest income exempt from regular federal income
tax and are not subject to regular federal income tax for Fund shareholders.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
income derived from the sale or disposition of bonds purchased with market
discount after April 30, 1993, they are treated as ordinary income whether the
shareholder has elected to receive them in cash or in additional shares.
Since the Fund's income is derived from interest and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
July 31, 1995 qualified for this deduction and it is not anticipated that any of
the current year's dividends will so qualify.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
which constitutes taxable income or a tax preference item under the federal
alternative minimum tax. If you have not held shares of the Fund for a full
calendar year, you may have designated as tax-exempt or as tax preference income
a percentage of income which is not equal to the actual amount of tax-exempt or
tax preference income earned during the period of your investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includable in the tax base for determining the
extent to which your social security or railroad retirement benefits will be
subject to regular federal income tax. You are required to disclose your receipt
of tax-exempt interest dividends on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund. For example,
distributions attributable to interest received from, or capital gain derived
from the disposition of, obligations of a given state or its political
subdivisions may be exempt from income taxes in that state.
If you are not a U.S. person for purposes of federal income taxation you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How Do I Buy Shares?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors and by the Fund directly. The use of the
term "securities dealer" shall include other financial institutions which,
either directly or through affiliates, have an agreement with Distributors to
handle customer orders and accounts with the Fund. Such reference, however, is
for convenience only and does not indicate a legal conclusion of capacity.
You may purchase shares of the Fund at the net asset value, without a sales
charge, next determined after receipt of a purchase order in proper form. The
minimum initial investment is $500 and subsequent investments must be $25 or
more. These minimums may be waived when the shares are purchased through plans
established by the Franklin Templeton Group. Purchases in proper form received
by the Fund prior to 3:00 p.m. Pacific time will be credited to your account on
that business day. If received after 3:00 p.m., the purchase will be credited
the following business day.
Many of the types of instruments in which the Fund invests must be paid for in
federal funds which are monies held by its custodian bank on deposit at the
Federal Reserve Bank of San Francisco and elsewhere. Therefore, the funds you
submit to purchase Fund shares generally cannot be invested by the Fund until
they are converted into and are available to the Fund in federal funds, which
may take up to two days. In such cases, your purchase may not be considered in
proper form and effective until such conversion and availability. In the event
the Fund is able to make investments immediately (within one business day), it
may accept a purchase order with payment other than in federal funds; in such
event shares of the Fund will be purchased at the net asset value next
determined after receipt of the order and payments.
You may purchase shares in any of the following ways:
By Mail
(1) For an initial investment, include the completed Shareholder Application
contained in this Prospectus. For subsequent investments, the deposit slips
which are included with your monthly statement or checkbook (if one has been
requested) may be used, or you should reference the account number on your
check.
(2) Make your check, Federal Reserve draft or negotiable bank draft payable to
Franklin Tax-Exempt Money Fund. Instruments drawn on other investment companies
may not be accepted.
(3) Send your check, Federal Reserve draft or negotiable bank draft to Franklin
Tax-Exempt Money Fund, 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
California 94403-7777.
By Wire
(1) Call Franklin's Shareholder Services Department at 1-800/632-2301. If that
line is busy, call 415/312-2000 collect, to advise that funds will be wired for
investment. The Fund will supply a wire control number for the investment. You
must obtain a new wire control number every time money is wired into an account
in the Fund. Wire control numbers are effective for one transaction only and may
not be used more than once. Wired money which is not properly identified with a
currently effective wire control number will be returned to the bank from which
it was wired and will not be credited to your account.
(2) Wire funds to Bank of America, ABA routing number 121000358, for credit to
Franklin Tax-Exempt Money Fund, A/C 1493-3-04779. The wire control number and
your name must be included. Wired funds received by the Bank and reported by the
Bank to the Fund by 3:00 p.m. Pacific time are normally credited on that day.
Later wires are credited the following business day.
(3) If the purchase is not to an existing account, you must send a completed
Shareholder Application to Franklin Tax-Exempt Money Fund at 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, California 94403-7777, to assure proper credit
for the wire.
Through Securities Dealers
You may invest in the Fund by purchasing shares through a securities dealer.
Securities dealers which process orders on behalf of their customers may charge
a reasonable fee for their services. Investments made directly, without the
assistance of a securities dealer, are without charge. In certain states, shares
of the Fund may be purchased only through registered securities dealers.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. You may terminate the program
at any time by notifying Investor Services by mail or by phone.
General
The Fund and Distributors reserve the right to reject any order for the purchase
of shares of the Fund. In addition, the offering of shares of the Fund may be
suspended by the Fund at any time and resumed at any time thereafter.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
If the purchase or sale of Fund shares with the assistance of certain banks were
deemed to be an impermissible activity for such bank under the Glass Steagall
Act or other federal laws, such activities would likely be discontinued by such
bank. Investors utilizing such bank assistance would then be able to seek other
avenues to invest in Fund shares, such as securities dealers registered with the
SEC or from the Fund directly.
How Do I Sell Shares?
All or any part of your investment may be converted into cash, without penalty
or charge, by redeeming shares in any one of the methods discussed below on any
day the New York Stock Exchange (the "Exchange") is open for trading. Regardless
of the method of redemption, payment for your redeemed shares will be sent
within seven days after receipt of the redemption request in proper form, except
that the Fund may delay the mailing of the redemption check, or a portion
thereof, until the clearance of the check used to purchase fund shares, which
may take up to 15 days or more. Although the use of a certified or cashier's
check will generally reduce this delay, shares purchased with such instruments
will also be held pending clearance. Shares purchased by federal funds wire are
available for immediate redemption. Please provide a telephone number where you
may be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
You may redeem shares in any of the following ways:
By Check
The Fund will supply redemption drafts (which are similar to checks and are
referred to as checks throughout this Prospectus) to you if you request them on
the Shareholder Application. The election of the check redemption procedure does
not create a checking account or other bank account relationship between you and
the Fund or any bank. These checks are drawn through the Fund's custodian, Bank
of America NT & SA (the "Custodian" or "Bank"). You will generally not be able
to convert a check drawn on the Fund account into a certified or cashier's check
by presentation at the Custodian. You may make checks payable to the order of
any person in any amount not less than $100. There is no charge to you for this
check redemption procedure.
When a check is presented for payment, the Fund will redeem a sufficient number
of full and fractional shares in your account to cover the amount of the check.
This enables you to continue earning daily income dividends until the check
clears. Shares will be redeemed at the net asset value next determined after
receipt of a check which does not exceed the collected balance of the account.
You may only redeem shares by check from accounts in which no share certificates
have been issued.
Because the Fund is not a bank, no assurance can be given that stop payment
orders on checks written by you will be effective. The Fund, however, will use
its best efforts to see that such orders are carried out.
You will be subject to the right of the Bank to return unpaid checks in amounts
exceeding the collected balance of your account at the time the check is
presented for payment. Checks should not be used to close a Fund account because
when the check is written you will not know the exact total value of the account
on the day the check clears. The Bank reserves the right to terminate this
service at any time upon notice to shareholders.
By Telephone
You may redeem shares by calling Investor Services at 1-800/632-2301. Payment of
redemption requests of $1,000 or less (once per business day) will be sent by
mail to your address as reflected on the Fund's records. For payments over
$1,000, you must complete the "Wire Redemptions Privilege" section of the
Shareholder Application. Proceeds will then be wired directly to the commercial
bank or brokerage firm designated by you. Wires will not be sent for redemption
requests of $1,000 or less. You may have redemption proceeds of over $1,000, up
to $50,000 per day per Fund account, sent directly to your address of record by
filing a completed Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement") included with this Prospectus. Information may also
be obtained by writing to the Fund or Investor Services at the address shown on
the cover or by calling the number above. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions given by telephone are
genuine. You, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
Telephone redemption requests received before 3:00 p.m. Pacific time on any
business day will be processed that same day. The redemption check will be sent
within seven days, made payable to all the registered owners on the account, and
will be sent only to the address of record. Wire payments will be transmitted
the next business day following receipt prior to 3:00 p.m. Pacific time of a
request for redemption in proper form. You may wish to allow for longer
processing time if you want to assure that redemption proceeds will be available
at a specific time for a specific transaction. You may be able to have
redemption proceeds wired to an escrow account the same day, provided that the
request is received prior to 9:00 a.m. Pacific time.
During periods of drastic economic or market changes, it is possible that the
telephone redemption privilege may be difficult to implement. In this event, you
should follow the other redemption procedures discussed in this section.
Redemption instructions must include your name and account number and be called
to the Fund. No shares for which share certificates have been issued may be
redeemed by telephone. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, you
should follow the other redemption procedures set forth in this Prospectus.
Institutional investors who wish to execute redemptions in excess of $50,000
must complete an Institutional Telephone Privileges Agreement which is available
from the Franklin Templeton Institutional Services Department by calling
1-800/321-8563. The telephone redemption privilege may be modified or
discontinued by the Fund at any time upon 60 days' notice to shareholders.
Wiring of redemption proceeds is a special service made available to
shareholders whenever possible. The offer of this service, however, does not
bind the Fund to meet any redemption request by wire or in less than the
seven-day period prescribed by law. Neither the Fund nor its agents shall be
liable to any shareholder or other person for a redemption payment by wire which
for any reason may not be processed as described in this section.
By Mail
You may redeem all or a portion of your shares by sending a letter to Investor
Services, at the address shown on the back cover of this Prospectus, requesting
redemption and surrendering share certificates if any have been issued.
Written requests for redemption must be signed by all registered owners.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced below. For your own
protection, you should send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more
joint owners of an account cannot be confirmed, (b) multiple owners
have a dispute or give inconsistent instructions to the Fund, (c) the
Fund has been notified of an adverse claim, (d) the instructions received
by the Fund are given by an agent, not the actual registered owner, (e)
the Fund determines that joint owners who are married to each other are
separated or may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership, association,
or other entity has not been established to the satisfaction of the
Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) copy of the pertinent pages of the trust document listing the trustee(s) or
a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department or your securities dealer may call
Franklin's Dealer Services Department.
Written requests for redemption, all share certificates, and all certificate
assignment forms should be sent to the Fund or Investor Services at the address
shown on the back cover of this Prospectus.
Payment for written requests for redemption will be sent within seven days after
receipt of the request in proper form. Redemptions will be made in cash at the
net asset value per share next determined after receipt by the Fund of a
redemption request in proper form, including all share certificates,
assignments, signature guarantees and other documentation as may be required by
Investor Services. The amount received upon redemption may be more or less than
your original investment. Redemptions may be suspended under certain limited
circumstances pursuant to rules adopted by the SEC.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The
documents described under "By Mail" above, as well as a signed letter of
instruction, are required regardless of whether you redeem shares directly or
submit the shares to a securities dealer for repurchase. Your letter should
reference the Fund, your account number, the fact that the repurchase was
ordered by a dealer and the dealer's name. Details of the dealer-ordered trade,
such as trade date, confirmation number, and the amount of shares or dollars,
will help speed processing of the redemption. The seven-day period within which
the proceeds of your redemption will be sent will begin when the Fund receives
all documents required to complete ("settle") the repurchase in proper form. It
is in your best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. Your securities dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares under "How Do I Buy and Sell Shares?"
Contingent Deferred Sales Charge
The Fund does not impose either a front-end sales charge or a contingent
deferred sales charge. If, however, shares redeemed were shares acquired by
exchange from another Franklin Templeton Fund which would have assessed a
contingent deferred sales charge upon redemption, such charge will be made by
the Fund, as described below. The 12-month contingency period will be tolled (or
stopped) for the period such shares are exchanged into and held in the Fund.
Certain Franklin Templeton Funds, in order to recover commissions paid to
securities dealers on investments of $1 million or more, impose a contingent
deferred sales charge of 1% on certain redemptions made by those investors
within 12 months of the calendar month of such investments. The charge is 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares, and
is retained by Distributors. In determining if a charge applies, shares not
subject to a contingent def erred sales charge are deemed to be redeemed first,
in the following order: (i) Shares representing amounts attributable to capital
appreciation; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than 12 months. Shares subject
to a contingent deferred sales charge are then redeemed on a "first-in,
first-out" basis. For tax purposes, a contingent deferred sales charge is
treated as either a reduction in redemption proceeds or an adjustment to the
cost basis of the shares redeemed.
Unless otherwise specified, requests for redemptions for a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
What Programs and Privileges Are
Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account, or networked account
through National Securities Clearing Corporation ("NSCC") (see the section
captioned "Registering Your Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and any capital gain distributions, are generally
credited to an account in your name on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in uncertificated form (also
known as "plan balance") minimizes the risk of loss or theft of a share
certificate. A lost, stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a bond, which is
generally borne by you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
Confirmations
A confirmation statement will be sent to you monthly to reflect the daily
dividends reinvested, as well as after each transaction which affects your
account, except a redemption effected by check. The statement will show the
total number of Fund shares you own, including the number of shares in "plan
balance" for your account.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase Class I shares of another Franklin Templeton Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than your actual yield or income, part of the payment may be a return of your
investment.
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Multiple Accounts for Fiduciaries
Special procedures have been designed for banks and other institutions wishing
to open multiple accounts in the Fund. Further information is included in the
SAI under "How Do I Buy and Sell Shares? - Special Services."
Rights of Accumulation
The cost or current value (whichever is higher) of your shares of the Fund will
be included in determining the sales charge discount to which you may be
entitled when purchasing shares in one or more of the funds in the Franklin
Group of Funds and the Templeton Group of Funds which are sold with a sales
charge. Included for these aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and Franklin Government
Securities Trust (the "Franklin Funds"), (b) other investment products
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) and (c) the U.S. mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Fund(s)."
Purchases of Fund shares will also be included toward the completion of a Letter
of Intent with respect to any of the Franklin Templeton Funds which are sold
with a sales charge.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? -
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for
Class I shares of other Franklin Templeton Funds which are eligible for sale in
your state of residence and in conformity with such fund's stated eligibility
requirements and investment minimums. No exchanges between different classes of
shares are allowed and, therefore, shares of the Fund may not be exchanged for
Class II shares of other Franklin Templeton Funds. Class II shareholders of
Franklin Templeton Funds may, however, elect to direct their dividends and
capital gain distributions to the Fund, or to another Franklin Templeton Fund
for investment at net asset value.
You may choose to redeem shares of the Fund and purchase Class II shares of
other Franklin Templeton Funds but such purchase will be subject to the Class II
sales charges for that fund which typically include a front-end sales charge and
a contingent deferred sales charges for the contingency period of 18 months.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods for exchanges at net asset value or applicable sales
charges. Exchanges may be made in any of the following ways:
By Mail
Send written instructions signed by all account owners accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You, or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS (R) system (day or night) at 1-800/247-1753. If you do not
want this privilege extended to a particular account, please notify the Fund or
Investor Services.
The telephone exchange privilege allows you to exchange shares from the Fund
into an identically registered account in Class I shares of the other available
Franklin Templeton Funds. The telephone exchange privilege is available only for
uncertificated shares or those which have previously been deposited in your
account. The Fund and Investor Services will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. Please see
"Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See "By Telephone" above. A
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Shares of the Fund acquired other than pursuant to the exchange privilege or the
reinvestment of dividends with respect to such shares, may be exchanged for
Class I shares of other Franklin Templeton Funds at the offering price. The
offering price includes the applicable sales charge of the fund into which the
shares are being exchanged. Exchanges will be effected at the respective net
asset values or offering prices of the funds involved at the close of business
on the day on which the request is received in proper form.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Timing Accounts
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange. All
other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How Do I Buy Shares?" reserve
the right to refuse any order for the purchase of shares.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you and your investment
representative of record, if any, may be able to execute various transactions,
including: (i) effect a change in address, (ii) change a dividend option, (iii)
transfer Fund shares in one account to another identically registered account in
the Fund, (iv) request the issuance of certificates to be sent to the address of
record only and (v) exchange Fund shares by telephone as described in this
Prospectus. In addition, if you complete and file an Agreement as described
under "How Do I Sell Shares? - By Telephone," you will be able to redeem shares
of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance, or to send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined by the Fund at 3:00 p.m.
Pacific time each day that the Exchange is open for business. The net asset
value per share is calculated by adding the value of all portfolio holdings and
other assets, deducting the Fund's liabilities, and dividing the result by the
number of Fund shares outstanding.
The valuation of the Fund's portfolio securities is based upon their amortized
cost value, which does not take into account unrealized capital gain or loss.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
Fund's use of amortized cost which facilitates the maintenance of the Fund's per
share net asset value of $1.00 is permitted by Rule 2a-7 under the 1940 Act.
Further information is included under "How Are Fund Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
account information, current price and, if available, yield or other performance
information specific to the Fund or any Franklin Templeton Fund. In addition,
you may process an exchange, within the same class, into an identically
registered Franklin account and request duplicate confirmation or year-end
statements, money fund checks, and deposit slips.
Fund information may be accessed by entering Fund Code 114 followed by the #
sign. The system's automated operator will prompt you with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation to call is provided. The same numbers may be used when
calling from a rotary phone.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain various
measures of the Fund's performance, including quotations of its current,
effective, taxable equivalent yield and taxable equivalent effective yield.
Current yield as prescribed by the SEC is an annualized percentage rate which
reflects the change in value of a hypothetical account based on the income
received from the Fund during a seven-day period. It is computed by determining
the net change, excluding capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period. A hypothetical charge reflecting deductions from shareholder accounts
for management fees or shareholder services fees, for example, is subtracted
from the value of the account at the end of the period, and the difference is
divided by the value of the account at the beginning of the base period to
obtain the base period return. The result is then annualized. Effective yield is
computed in the same manner except that the annualization of the return for the
seven-day period reflects the results of compounding (that is, the effect of
reinvesting dividends paid on both the original share and those acquired from
the reinvestment of such dividends). Tax equivalent yield demonstrates the yield
from a taxable investment necessary to produce an after-tax yield equivalent to
that of a fund which invests in tax-exempt obligations. It is computed by
dividing the tax-exempt portion of a fund's yield (calculated as indicated) by
one minus a stated income tax rate and adding the product to the taxable portion
(if any) of the fund's yield.
Tax equivalent effective yield demonstrates the effective yield from a taxable
investment necessary to produce an after-tax effective yield equivalent to that
of a fund which invests in tax-exempt obligations. It is computed in the same
manner as is the fund's tax equivalent yield, except that it is based on the
tax-exempt portion of the fund's effective, rather than its current, yield. The
figure is calculated by dividing the tax-exempt portion of a fund's effective
yield by one minus a stated income tax rate and adding the product to the
taxable portion (if any) of the fund's effective yield.
In each case, performance figures are based upon past performance and will
reflect all recurring charges against Fund income. Such quotations will reflect
the value of any additional shares purchased with dividends from the original
share and any dividends declared on both the original share and such additional
shares. The investment results of the Fund, like all other investment companies,
will fluctuate over time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the Fund's
performance may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends July 31. Annual Reports containing audited financial
statements of the Fund, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to you. To
reduce the volume of mail sent to each household as well as to reduce Fund
expenses, Investor Services will attempt to identify related shareholders within
a household, and send only one copy of the report. Additional copies may be
obtained, without charge, upon request to the Fund at the telephone number or
address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Fund's authorized capital stock consists of five billion shares of no par
value. All shares are of one class, have one vote and, when issued, are fully
paid and nonassessable. All shares have equal voting, participation and
liquidation rights, but have no subscription, preemptive or conversion rights.
Shares of the Fund have cumulative voting rights, which means that in all
elections of directors each shareholder has the right to cast a number of votes
equal to the number of shares owned multiplied by the number of directors to be
elected at such election, and each shareholder may cast the whole number of
votes for one candidate or distribute such votes among two or more candidates.
The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board or by shareholders holding
at least ten percent of the shares entitled to vote at the meeting. Shareholders
will receive assistance in communicating with other shareholders in connection
with the election or removal of directors as provided in Section 16(c) of the
1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, your shares if your
account has a value of less than $250, one-half of the required minimum
investment, but only where the value of such account has been reduced by your
prior voluntary redemption of shares and has been inactive (except for the
reinvestment of distributions) for a period of at least six months, provided you
are notified in advance. For more information, see "How Do I Buy and Sell
Shares?" in the SAI.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to you caused by your failure to cash
such checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
Shares of the Fund may or may not constitute a legal investment for investors
whose investment authority is restricted by applicable law or regulation. SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations.
Registering Your Account
An account registration should reflect your intention as to ownership.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer or similar agreements on
file with Distributors. Unless such agreement has been executed and is on file
with Distributors, the Fund will not process the transfer and will so inform
your delivering securities dealer. To effect the transfer, you should instruct
the securities dealer to transfer the account to a receiving securities dealer
and sign any documents required by the securities dealers to evidence consent to
the transfer. Under current procedures the account transfer may be processed by
the delivering securities dealer and the Fund after the Fund receives
authorization in proper form from your delivering securities dealer. Account
transfers may be effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent and to have authorized
them to execute the instructions without further inquiry. At the present time,
such services which are available include the NSCC's "Networking," "Fund/SERV,"
and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment and withhold 31% of any such payments made to individuals and
other non-exempt shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required certifications that
appear in the Shareholder Application. You may also be subject to backup
withholding if the IRS or a securities dealer notifies the Fund that the TIN
furnished by you is incorrect or that you are subject to backup withholding for
previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
FRANKLIN
TAX-EXEMPT
MONEY FUND
STATEMENT OF
ADDITIONAL INFORMATION
DECEMBER 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How Does the Fund Invest Its Assets? ... 2
Investment Restrictions ................ 6
Officers and Directors ................. 7
Investment Advisory and Other Services . 11
How Does the Fund Purchase Securities
For Its Portfolio? .................... 12
How Are Fund Shares Valued? ............ 13
How Do I Buy and Sell Shares? .......... 14
Additional Information Regarding
Distributions and Taxes ............... 16
The Fund's Underwriter ................. 17
General Information..................... 17
Financial Statements.................... 19
Appendix................................ 19
A Prospectus for the Franklin Tax-Exempt Money Fund (the "Fund"), dated December
1, 1995, as may be amended from time to time, provides the basic information a
prospective investor should know before investing in the Fund and may be
obtained without charge from the Fund or from its principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE AN INVESTOR WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE
READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
Investment Objective and Policies
As stated in the Prospectus, the investment objective of the Fund is to obtain
for its investors the highest level of current income that is exempt from
federal income taxes, consistent with liquidity and the preservation of capital.
The achievement of the Fund's objective will depend on market conditions
generally and on its investment manager's analytical and portfolio management
skills. The value of the securities held will fluctuate inversely with interest
rates, and therefore there is no assurance that the objective will be achieved.
Except as noted, the investment objective and policies of the Fund as set forth
herein are fundamental and may not be changed without the approval of a majority
of the Fund's outstanding shares.
The Fund will seek to achieve its objective by investing in a diversified
portfolio of high quality short-term debt obligations issued by states,
territories and possessions of the United States and by the District of
Columbia, and their political subdivisions and duly constituted authorities, the
interest from which is wholly exempt from federal income tax in the opinion of
bond counsel. Such securities are generally known as "Municipal Bonds" or
"Municipal Notes."
The Municipal Bonds and Municipal Notes in the Fund's portfolio will be invested
in issues which have been rated, at the time of purchase, not lower than Aa
(applicable to Municipal Bonds), MIG-2 (applicable to Municipal Notes), or P-2
(applicable to commercial paper) by Moody's Investors Service ("Moody's"), or AA
(Bonds), SP-2 (Notes) or A-2 (commercial paper) by Standard & Poor's Corporation
("S&P"), or AA (applicable to municipal bonds) or F-2 (applicable to municipal
notes and commercial paper) by Fitch Investors Service, Inc. ("Fitch"), or which
are unrated, but only if the investment manager believes that the financial
condition of such issuers limits the risks to the Fund to a degree comparable to
securities rated at least within the two highest grades by Moody's, S&P or
Fitch. Any Municipal Bond or Note which depends on the credit of the federal
government will be regarded as having a rating of Aaa (Moody's) or AAA (S&P or
Fitch). See the Appendix at the end of this SAI for a description of ratings.
Subsequent to its purchase by the Fund, a municipal security may be assigned a
lower rating or cease to be rated. Such an event generally would not require the
elimination of the issue from the portfolio, although it will be taken into
consideration by the Fund's investment manager in determining whether the Fund
should continue to hold the security. In addition to considering ratings
assigned by the rating services in its selection of portfolio securities for the
Fund, the investment manager will consider, among other things, information
concerning the financial history and condition of the issuer and its revenue and
expense prospects and, in the case of revenue bonds, the financial history and
condition of the source of revenue to service the debt securities.
The Fund may purchase other types of tax-exempt instruments, such as tax-exempt
commercial paper, issued by municipalities. Such investments will be limited to
those obligations which are rated no lower than P-2 (Moody's), A-2 (S&P) or F-2
(Fitch). With respect to short-term discount notes or tax-exempt commercial
paper which are not rated, the Fund may invest only in instruments of issuers
who have an outstanding debt security rated in the two highest grades by S&P,
Moody's or Fitch. The Fund may purchase other types of tax-exempt instruments as
long as, in the opinion of the Fund's investment manager, they are of a
comparable quality to the debt or commercial paper ratings stated above.
Generally, all of the instruments held by the Fund are offered on the basis of a
quoted yield to maturity and the price of the security is adjusted so that
relative to the stated rate of interest it will return the quoted rate to the
purchaser. The maturities of these instruments at the time of issue will
generally range from three to 13 months.
Each political subdivision, agency, or instrumentality and each multi-state
agency of which a state is a member, and each public authority which issues
private activity bonds on behalf of a private entity, will be regarded as a
separate issuer for determining the diversification of the Fund's portfolio.
Where securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
A bond for which the payments of principal and interest are secured or become
secured by an escrow account of securities backed by the full faith and credit
of the U.S. government ("defeased"), in general, will not be treated as an
obligation of the original municipality for purposes of determining issuer
diversification. Percentage limitations referred to in the Prospectus and SAI
are generally determined at the time an investment is made.
Description of Municipal and Other Securities
The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which the Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of other kinds of revenue,
such as federal revenues available under the Federal Revenue Sharing Program.
They are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways, roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or fully insured
mortgages, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. Many bonds provide additional
security in the form of a debt service reserve fund which may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided further security in the form of a state's assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Revenue Bonds which pay tax-exempt interest are, in most
cases, revenue bonds and are issued by or on behalf of public authorities to
raise money to finance various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such bonds is solely
dependent on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payments.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. During the
period between purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. To the extent that assets of the
Fund are held in cash pending the settlement of a purchase of securities, the
Fund would earn no income; however, it is the Fund's intention to be fully
invested to the extent practicable and subject to the policies stated above.
While when-issued securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them,
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase a municipal bond on a when-issued basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Fund believes that its net asset value or income will
not be adversely affected by the purchase of municipal bonds on a when-issued
basis. The Fund will establish a segregated account in which it will maintain
cash and marketable securities equal in value to commitments for when-issued
securities.
Callable Bonds. There are municipal bonds which are issued with provisions which
prevent them from being called, typically for periods of 5 to 10 years. During
times of generally declining interest rates, if the call-protection on callable
bonds expires, there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of factors, including
certain portfolio management strategies used by the Fund's investment manager,
the Fund believes it has reduced the risk of adverse impact on net asset value
based on calls of callable bonds. The investment manager may dispose of such
bonds in the years prior to their call dates, if the investment manager believes
the bonds are at their maximum premium potential. In pricing such bonds in the
Fund's portfolio, each callable bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on its net asset value. In light of the Fund's pricing policies
and because the Fund follows certain amortization procedures required by the
Internal Revenue Service, the Fund is not expected to suffer any material
adverse impact related to the value at which the Fund has carried the bonds in
connection with calls of bonds purchased at a premium. Notwithstanding such
policies, however, the reinvestment of the proceeds of any called bond may be in
bonds which pay a higher or lower rate of return than the called bonds; and, as
with any investment strategy, there is no guarantee that a call may not have a
more substantial impact than anticipated or that the Fund's objective will be
achieved.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow-secured bonds will often
receive a triple-A rating from S&P, Moody's and Fitch.
Stripped Municipal Securities. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of interest and
principal payments on municipal obligations.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate and a right of demand, which
may be unconditional, to receive payment of the unpaid principal balance plus
accrued interest upon a short notice period (generally up to 30 days) prior to
specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily up to monthly, and
are calculated to maintain the market value of the VRDN at approximately the par
value upon the adjustment date. The adjustments are typically based upon the
prime rate of a bank or some other appropriate interest rate adjustment index.
Certificates of Participation. The Fund may invest in municipal lease
obligations primarily through Certificates of Participation ("COPs"). COPs are
distinguishable from municipal debt in that the lease which is the subject of
the transaction typically contains a "non-appropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds.
U.S. Government Obligations which may be purchased by the Fund are issued by the
U.S. Treasury and include bills, certificates of indebtedness, notes and bonds,
or are issued by agencies and instrumentalities of the U.S. government and
backed by the full faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
Certificates of Deposit are certificates issued against funds deposited in a
commercial bank, are for a definite period of time, earn a specified rate of
return, and are normally negotiable.
Bankers' Acceptances are short-term credit instruments used to finance the
import, export, transfer, or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker/dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the Investment Company Act of 1940 ("1940 Act"). The U.S.
government security subject to resale (the collateral) will be held on behalf of
the Fund by a custodian approved by the Fund's Board of Directors and will be
held pursuant to a written agreement. The period of these repurchase agreements
will usually be short, from overnight to one week, and at no time will the Fund
invest in repurchase agreements with a term of more than one year. The
securities which are subject to repurchase agreements, however, may have
maturity dates in excess of one year from the effective date of the repurchase
agreement. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 10% of the market value of the
Fund's total assets would be invested in such repurchase agreements together
with all other illiquid investments.
Loans of Portfolio Securities. As approved by the Board of Directors and subject
to the following conditions, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
collateral with an initial market value at least 102% of the initial market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. Such collateral shall consist of cash,
securities issued by the U.S. Government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund engages in security loan arrangements with the
primary objective of increasing the Fund's income either through investing the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially. The Fund will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which its shares are
qualified for sale. Loans are typically subject to termination by the Fund in
the normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the lending Fund and its
shareholders. The Fund may pay reasonable finder's, borrowers', administrative,
and custodial fees in connection with a loan of its securities.
Income derived by the Fund from securities lending transactions, repurchase
transactions, and investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal personal income tax purposes
when distributed to shareholders. Income derived by the Fund from interest on
direct obligations of the U.S. government will be taxable for federal income tax
purposes when distributed to shareholders.
Private Activity Bonds. Interest on obligations which are classified as "private
activity bonds" is not excluded from gross income for federal income tax
purposes under Section 103(b)(1) of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), unless such bonds are registered (Section 149 of the Code)
and certain other requirements are satisfied. If the bonds do not satisfy these
requirements, they are not included in the Fund's definition of "municipal
securities," and the Fund will therefore not invest in them. Section 141(e) of
the Code, however, describes certain private activity bonds the interest on
which is excluded from federal gross income (certain small issues and
obligations to finance certain exempt facilities which may be leased to or used
by persons other than the issuer), except when the bonds are held by
"substantial users" or persons related to substantial users as defined below.
The Fund may invest periodically in private activity bonds described in Section
141 of the Code. Since the Fund's holding of such bonds may be attributed to
such substantial users, the Fund may not be an appropriate investment for
persons or entities which are substantial users of facilities financed by
private activity bonds or for investors who are "related persons." Generally, an
individual will not be a related person under the Code unless the investor or
the investor's immediate family (spouse, brothers, sisters and lineal
descendants) own, directly or indirectly, in the aggregate more than 50% in
value of the equity of a corporation or partnership which is a substantial user
of a facility financed with the proceeds of private activity bonds. A
"substantial user" of such facilities is defined generally by Section
1.103-11(b) of the Treasury regulations as a "non-exempt person who regularly
uses a part of a facility" financed with the proceeds of a private activity
bond.
Interest on private activity bonds, as well as interest on municipal bonds which
are not private activity bonds, may become includable in gross income,
retroactively to the date of issue, if the bonds become "arbitrage bonds" as
defined in Section 148 of the Code or, in the case of private activity bonds,
certain requirements of the Code are not satisfied subsequent to the date of
issue.
General
The ability of the Fund to achieve its investment goals is dependent on a number
of factors, including the skills of its investment manager in purchasing
municipal obligations whose issuers have the continuing ability to meet their
obligations for the payment of interest and principal when due. The ability to
achieve a high level of income is dependent on the yields of the securities in
the portfolio. Yields on municipal obligations are the product of a variety of
factors, including the general conditions of the money market and of the
municipal bond and municipal note market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. Municipal obligations
with longer maturities tend to produce higher yields and are generally subject
to potentially greater price fluctuations than obligations with shorter
maturities.
The Fund's policy will generally be to hold securities to maturity rather than
to follow a policy of trading. Due to the short-term nature of the maturities of
the Fund's securities held in its portfolio, it is not expected that there will
be any reportable annual portfolio turnover.
Opinions relating to the validity of municipal securities and to the exclusion
from gross income for federal income tax purposes of the interest thereon are
rendered by bond counsel at the time of issuance. The Fund does not review the
proceedings relating to the issuance of municipal securities, the basis for such
opinions, or actions of any of the parties thereto with respect to compliance
with requirements of the Code subsequent to the date of issue to preserve the
exclusion from gross income.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities, in
which the Fund may also invest, to the extent such investments would be
consistent with the foregoing objective and policies.
Investment Restrictions
The investment restrictions listed below have been adopted by the Fund and may
not be changed without the approval of a majority of the Fund's outstanding
shares. These restrictions reflect self-imposed standards as well as state and
federal requirements. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after, and is caused by, an
acquisition or encumbrance of securities or assets of, or borrowings by, the
Fund.
The Fund may not:
(1) Purchase the securities of any issuer (except the United States government,
its agencies or instrumentalities or securities which are backed by the full
faith and credit of the United States) if, as a result, more than 5% of its
total assets would be invested in the securities of such issuer or more than 10%
of the outstanding voting securities of any class of any issuer would be held by
the Fund.
(2) Borrow money, except from a bank for temporary or emergency purposes and
not for investment purposes, and then in an amount not exceeding 10% of the
value of the Fund's total assets at the time of borrowing. (No new investments
will be made by the Fund while any outstanding borrowings exceed 5% of its total
assets.) Secured temporary borrowings may take the form of reverse repurchase
agreements, pursuant to which the Fund would sell portfolio securities for cash
and simultaneously agree to repurchase them at a specified date for the same
amount of cash plus an interest component.
(3) Pledge, mortgage, or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities having
a market value at the time of pledge not exceeding 10% of the value of the
Fund's total assets.
(4) Knowingly purchase or otherwise acquire any securities which are subject to
legal or contractual restrictions on resale or for which there is no readily
available market or engage in any repurchase transactions of more than seven
days' duration if, as a result, more than 10% of its total assets would be
invested in all such securities.
(5) Underwrite any issue of securities, except to the extent that the purchase
of municipal obligations in accordance with the Fund's investment objectives,
policies, and restrictions, either directly from the issuer, or from an
underwriter for an issuer, may be deemed to be underwriting.
(6) Purchase or sell real estate, but this shall not prevent the Fund from
investing in municipal obligations secured by real estate or interests therein.
(7) Purchase or sell commodities or commodity contracts or invest in oil, gas
or other mineral exploration or development programs.
(8) Make loans, except (i) by the purchase of a portion of an issue of debt
securities in accordance with its investment objectives, policies, and
restrictions, (ii) by engaging in repurchase transactions, and (iii) by making
loans of portfolio securities not in excess of 10% of the value of the Fund's
total assets.
(9) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of transactions.
(10) Purchase or retain the securities of any issuer other than the securities
of the Fund, if, to the Fund's knowledge, those directors and officers of the
Fund, or of the investment manager, who individually own beneficially more than
1/2 of 1% of the outstanding securities of such issuer together own beneficially
more than 5% of such outstanding securities.
(11) Invest for the purpose of exercising control or management of another
company.
(12) Write, purchase or sell puts, calls, or combinations thereof, except that
it may obtain rights to resell Municipal Bonds and Notes as set forth under "How
Does the Fund Invest Its Assets?"
(13) Purchase securities of other investment companies, except in connection
with a merger, consolidation or acquisition of assets.
(14) Purchase securities (other than Municipal Bonds, Notes and obligations
issued or guaranteed by the United States government, its agencies or
instrumentalities) if, as a result, more than 25% of total Fund assets would be
invested in any one industry.
(15) Purchase an industrial revenue bond if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue bonds where
the payment of principal and interest are the responsibility of companies with
less than three years of operating history.
Officers and Directors
The Board of Directors (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The directors, in turn, elect the officers of the Fund
who are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and directors and their principal occupations for
the past five years are listed below. Directors who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk
(*).
Positions and Offices Principal Occupations
Name, Age and Address with the Fund During Past Five Years
Frank H. Abbott, III (74) Director
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Director
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Director
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (50) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Thomas J. Kenny (32) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Richard C. Stoker (58) Vice President
11615 Spring Ridge Rd.
Potomac, Maryland 20854
Senior Vice President, Franklin Templeton Distributors, Inc.; Vice President,
Franklin Management, Inc.; and officer of five of the funds in the Franklin
Group of Funds.
R. Martin Wiskemann (68) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 20 of the
investment companies in the Franklin Group of Funds.
The preceding table indicates those officers and directors who are also
affiliated persons of Distributors and Advisers. Directors not affiliated with
the investment manager ("nonaffiliated directors") are currently paid fees of
$100 per month plus $100 per meeting attended. As indicated above, certain of
the Fund's nonaffiliated directors also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Group of Funds(R)
and the Templeton Group of Funds (the "Franklin Templeton Group of Funds") from
which they may receive fees for their services. The following table indicates
the total fees paid to nonaffiliated directors by the Fund and by other funds in
the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Total Fees Received Number of Boards
Total Fees from the Franklin in the Franklin
Received Templeton Group Templeton Group on
Name from Fund* of Funds** which Each Serves***
<S> <C> <C> <C>
Frank H. Abbott, III........................... $2,400 $176,870 31
Harris J. Ashton............................... $2,400 $318,125 56
S. Joseph Fortunato............................ $2,400 $334,265 58
David W. Garbellano............................ $2,400 $153,300 30
Frank W.T. LaHaye.............................. $2,300 $150,817 26
Gordon S. Macklin.............................. $2,400 $301,885 53
*For the fiscal year ended July 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of 162 U.S. based funds
or series.
</TABLE>
Nonaffiliated directors 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, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. Certain officers or directors 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. For
additional information concerning director compensation and expenses, please see
the Fund's Annual Report to Shareholders.
As of September 5, 1995, the officers and directors, as a group, owned of record
and beneficially approximately 53,427 shares, or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $129
billion in assets for more than 3.9 million shareholder accounts.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's extensive research
activities include, as appropriate, traveling to meet with issuers and to
scrutinize project sites. The Manager's activities are subject to the review and
supervision of the Board to whom the Manager renders periodic reports of the
Fund's investment activities. The Manager, at its own expense, furnishes the
Fund with office space and office furnishings, facilities and equipment required
for managing the business affairs of the Fund; maintains all internal
bookkeeping, clerical, secretarial and administrative personnel and services;
and provides certain telephone and other mechanical services. The Manager is
covered by fidelity insurance on its officers, directors and employees for the
protection of the Fund. The Fund bears all of its expenses not assumed by the
Manager.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
daily fee (payable at the request of the Manager) computed at the rate of 1/584
of 1% (approximately 5/8 of 1% per year) of the daily net assets of the Fund at
the close of each business day on net assets up to and including $100 million;
plus 1/730 of 1% (approximately 1/2 of 1% per year) of average daily net assets
over $100 million up to and including $250 million; and 1/811 of 1%
(approximately 45/100 of 1% per year) of average daily net assets over $250
million.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 1.5% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements.
The Manager agreed in advance to limit its management fees and to assume
responsibility for making payments, is necessary, to offset certain operating
expenses otherwise payable by the Fund. This action by the Manager to limit its
management fees may be terminated by the Manager at any time.
For the fiscal years ended 1993, 1994 and 1995, the management fees, before any
advance waivers, were $1,068,821, $1,250,390 and $1,102,243, respectively, and
the management fees actually paid by the Fund for the same periods were
$865,069, $886,611 and $742,949, respectively.
See the Statement of Operations in the financial statements included in the
Fund's Annual Report to Shareholders for details of these expenses.
The management agreement is in effect until February 29, 1996. Thereafter, it
may continue for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Fund's directors who are not parties to
the management agreement or interested persons of any such party (other than as
directors of the Fund), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Fund
or by the Manager on 60 days' written notice and will automatically terminate in
the event of its assignment, as defined in the 1940 Act.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds which it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, the Manager is not obligated to
recommend, purchase or sell, or to refrain from recommending, purchasing or
selling, with respect to the Fund, any security which the Manager and "access
persons" as defined in the 1940 Act, may purchase or sell for its or their own
account(s) or for the accounts of any other fund; or from investing in
securities held by the Fund or other funds which it manages or administers. Of
course, any transactions for the accounts of the manager and other "access
persons," will be made in compliance with the Fund's Code of Ethics.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California, 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended July 31, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders.
How Does the Fund Purchase Securities For Its Portfolio?
The Manager makes the investment decisions and arranges for the placement of buy
and sell orders and the execution of portfolio transactions for the Fund. In
executing portfolio transactions, the Manager seeks the most favorable prices
consistent with the best execution of the orders. So long as the Manager
believes it is obtaining the best execution, it will give consideration in
placing portfolio transactions to broker-dealers furnishing research,
statistical or factual information or wire or other services to the Fund or the
Manager, including appraisals or valuations of portfolio securities of the Fund.
While the information and services provided by broker-dealers are useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Manager and thus reduce its expenses, they are of
indeterminable value and will not reduce the management fee payable to the
Manager by the Fund.
Depending on the Manager's view of market conditions, the Fund may or may not
purchase securities with the expectation of holding them to maturity, although
its general policy is to hold securities to maturity. The Fund may, however,
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer. The Fund does not anticipate that
it will incur a significant amount of brokerage expense because brokerage
commissions are not normally incurred on investments in short-term money market
instruments which are generally traded on a "net" basis, that is, in principal
amounts without the addition or deduction of brokerage commissions or transfer
taxes.
Purchases of portfolio securities may be made directly from issuers or from
underwriters. Where possible, purchase and sale transactions will be effected
through dealers (including banks) which specialize in the types of securities
which the Fund will be holding, unless better executions are available
elsewhere. Dealers and underwriters usually act as principal for their own
account. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the ask price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter which has provided research or other services as mentioned
above. No broker or dealer affiliated with the Fund or with the Manager may
purchase securities from, or sell securities to, the Fund.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
For each of the past three fiscal years ended July 31, 1995, the Fund paid no
brokerage commissions. As of July 31, 1995 the Fund did not own securities of
its regular broker-dealers.
How Are Fund Shares Valued?
As noted in the Prospectus, the net asset value per share for purposes of both
purchase and redemption of shares is determined by the Fund on each day that the
Exchange is open for business. Valuation is currently made as of 3:00 p.m.
Pacific time. As of the date hereof, the Fund is informed that the Exchange
intends to close in observance of the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share of the portfolio
is calculated by adding the value of all securities and other assets in the
portfolio, deducting the Fund's liabilities, and dividing by the number of
shares outstanding.
The valuation of the Fund's portfolio securities (including any securities held
in a separate account maintained for when-issued securities) is based upon their
amortized cost which does not take into account unrealized capital gains or
losses. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in calculation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument. During periods of
declining interest rates, the daily yield on shares of the Fund computed as
described above may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based upon market
prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Fund resulted in a lower aggregate
portfolio value on a particular day, a prospective investor in the Fund would be
able to obtain a somewhat higher yield than would result from investment in a
fund utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.
The Fund's use of amortized cost which facilitates the maintenance of the Fund's
per share net asset value of $1.00 is permitted by a rule adopted by the
Securities and Exchange Commission ("SEC"). Pursuant to this rule, the Fund must
adhere to certain conditions. The Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, only purchase instruments having
remaining maturities of 397 calendar days or less, and invest only in those
United States dollar-denominated instruments that the Board determines present
minimal credit risks and which are, as required by the federal securities laws,
rated in one of the two highest rating categories as determined by nationally
recognized statistical rating agencies, instruments deemed comparable in quality
to such rated instruments, or instruments, the issuers of which, with respect to
an outstanding issue of short-term debt that is comparable in priority and
protection, have received a rating within the two highest categories of
nationally recognized statistical rating agencies. As discussed in the
Prospectus, securities subject to floating or variable interest rates with
demand features in compliance with applicable rules of the SEC may have stated
maturities in excess of one year.
The Board has agreed to establish procedures designed to stabilize, to the
extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. These procedures will include review
of the Fund's portfolio holdings by the directors, at such intervals as they may
deem appropriate, to determine whether the Fund's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Board. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, it will take such corrective action as they
regard as necessary and appropriate, which may include the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends, redemptions of shares in
kind, or establishing a net asset value per share by using available market
quotations.
How Do I Buy and Sell Shares?
Effectiveness of Purchase Orders
The purchase price for shares of the Fund is the net asset value of such shares
next determined after receipt and acceptance of a purchase order in proper form.
Payments transmitted by wire and received by the custodian and reported by the
custodian to the Fund prior to 3:00 p.m. Pacific time on any business day are
normally effective on the same day as received. Wire payments received or
reported by the custodian to the Fund after that time will normally be effective
on the next business day. Payments transmitted by check or other negotiable bank
draft will normally be effective within two business days for checks drawn on a
member bank of the Federal Reserve System and longer for most other checks. All
checks are accepted subject to collection at full face value in United States
funds and must be drawn in United States dollars on a United States bank. Checks
drawn in United States funds on foreign banks will not be credited to the
shareholder's account and dividends will not begin accruing until the proceeds
are collected, which can take a long period of time. The Fund reserves the
right, in its sole discretion, to either (a) reject any order for the purchase
or sale of shares denominated in any other currency, or (b) honor the
transaction or make adjustments to the shareholder's account for the transaction
as of a date and with a foreign currency exchange factor determined by the
drawee bank.
Shareholder Accounting
All purchases of Fund shares will be credited to the shareholder in full and
fractional shares of the Fund (rounded to the nearest 1/1000 of a share) in an
account maintained for the shareholder by the Fund's transfer agent. Share
certificates will not be issued unless requested by the investor or the
investor's securities dealer, and no certificates will be issued for fractional
shares at any time. No certificates will be issued to shareholders who have
elected redemption by check or by preauthorized bank or brokerage firm account
methods of withdrawing cash from their accounts. To open an account in the name
of a corporation, a resolution of the corporation's board of directors will be
required.
The Fund reserves the right to reject any order for the purchase of shares of
the Fund and to waive minimum investment requirements. In addition, the offering
of shares of the Fund may be suspended at any time and resumed at any time
thereafter.
Shareholder Redemptions
All requests for redemption, all share certificates and all share assignments
should be sent to the Fund, c/o Franklin/Templeton Investor Services, Inc., 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund will make payment for all redemptions within seven days after receipt
of such redemption request in proper form. The Fund reserves the right, however,
to suspend redemptions or postpone the date of payment (1) for any periods
during which the Exchange is closed (other than for the customary weekend and
holiday closings), (2) when trading in the markets the Fund usually utilizes is
restricted or an emergency exists, as determined by the SEC, so that disposal of
the Fund's investments or the determination of the Fund's net asset value is not
reasonably practicable, or (3) for such other periods as the SEC, by order, may
permit for the protection of the Fund's shareholders.
In connection with exchanges (see Prospectus "What If My Investment Outlook
Changes? - Exchange Privilege"), it should be noted that since the proceeds from
the sale of shares of an investment company generally are not available until
the fifth business day following the redemption, the fund into which the Fund
shareholders are seeking to exchange reserves the right to delay issuing shares
pursuant to an exchange until the fifth business day. The redemption of shares
of the Fund to complete an exchange will be effected at the close of business on
the day the request for exchange is received in proper form at the net asset
value then effective.
Use of the exchange privilege in conjunction with market timing services offered
through numerous securities dealers has become increasingly popular as a means
of capital management. In the event that a substantial portion of the Fund's
shareholders should, within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have to liquidate
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the directors reserve the right to make payments in whole or in
part in securities or other assets of the Fund in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the prior voluntary redemption of shares. Until
further notice, it is the present policy of the Fund not to exercise this right
with respect to any shareholder whose account has a value of $250 or more. In
any event, before the Fund redeems such shares and sends the proceeds to the
shareholder, it will notify the shareholder that the value of the shares in the
account is less than the minimum amount and allow the shareholder 30 days to
make an additional investment in an amount which will increase the value of the
account to at least $500.
Reports to Shareholders
The Fund sends annual and semiannual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
Investor Services may charge separate fees to shareholders, to be negotiated
directly with such shareholders, for providing special services in connection
with their accounts, such as processing a large number of checks each month.
Fees for special services to shareholders will not increase the expenses borne
by the Fund.
As noted in the Prospectus, special procedures have been designed for banks and
other institutions wishing to open multiple accounts in the Fund. The
institution may open a single master account by filing one application form with
the Fund, signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is filed by listing
them or instructions may be provided to the Fund at a later date. These
sub-accounts may be established by the institution with registration either by
name or number. The investment minimums applicable to the Fund are applicable to
each sub-account. The Fund will provide each institution with a written
confirmation for each transaction in a sub-account and arrangements may be made
at no additional charge for the transmittal of duplicate confirmations to the
beneficial owner of the sub-account. Further, the Fund will provide to each
institution, on a quarterly basis, or more frequently as requested, a statement
which will set forth each sub-account's share balance, income earned for the
period, income earned for the year to date, and total current market value.
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund. The
cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. These financial institutions may also charge a fee for their services
directly to their clients.
Additional Information
Regarding Distributions and Taxes
Distributions
Distributions and distribution adjustments resulting from realized gains and
losses on the sale of portfolio securities or from unrealized appreciation or
depreciation in the value of portfolio securities are required to maintain a
$1.00 net asset value and may result in under or over distributions of
investment company taxable income or net tax-exempt income.
The Fund may derive capital gains and losses in connection with sales or other
dispositions of its portfolio securities. However, because the Fund's portfolio
under normal circumstances is composed of short-term securities, the Fund does
not expect to realize any long-term capital gains or losses. Any net short-term
or long-term capital gains which are realized by the Fund (adjusted for any
daily amounts of unrealized appreciation or depreciation reported above and
taking into account any capital loss carryovers) will generally be distributed
once each year and may be distributed more frequently if necessary in order to
avoid federal excise taxes. Any distribution of capital gains will be reinvested
in the form of additional shares at net asset value, unless the shareholder has
previously elected on the Shareholder Application or filed written instructions
with Investor Services to have them paid in cash.
As noted in the Prospectus, the Fund declares dividends for each day that the
Fund's net asset value is calculated equal to all of its daily net interest
income, payable to shareholders of record as of the close of business the
preceding day.
Shareholders who so request may have their dividends paid out monthly in cash.
The shares reinvested and credited to their account during the month will be
redeemed as of the close of business on the last bank business day of the month
and the proceeds will be paid to them in cash. If a shareholder withdrew the
entire amount in the account at any time during the month, all dividends accrued
with respect to the account during the month to the time of withdrawal would be
paid in the same manner and at the same time as the proceeds of withdrawal. Each
shareholder will receive a monthly summary of the shareholder's account,
including information as to dividends reinvested or paid.
The Board reserves the right to revise the above dividend policy or postpone the
payment of dividends, if warranted in its judgment, due to unusual circumstances
such as a large expense, loss or unexpected fluctuation in net assets.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request to change the dividend option and
the proceeds will be reinvested in additional shares until new instructions are
received.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate the shareholder if the shareholder's mail is returned as undeliverable or
the Fund is otherwise unable to locate the shareholder or verify the current
mailing address. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
Taxation
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The directors reserve the
right not to maintain the qualification of the Fund as a regulated investment
company if they determine such course of action to be beneficial to
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
tax-exempt interest dividends) to shareholders will be taxable to the extent of
the Fund's available earnings and profits.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss, if any, are treated as long-term capital gain
regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount-that is, for a price that is less than the principal amount of the
bond-or for a price that is less than the principal amount of the bond where the
bond was issued with original issue discount and such discount exceeds a de
minimis amount under the Code. For such obligations purchased after April 30,
1993, with a fixed maturity exceeding one year from the date of issue, a portion
of the gain (not to exceed the accrued portion of market discount as of the time
of sale or disposition) is treated as ordinary income rather than capital gain.
Any distribution by the Fund of such ordinary income to its shareholders will be
subject to regular income tax in the hands of Fund shareholders. In any fiscal
year, the Fund may elect not to distribute to its shareholders its taxable
ordinary income and to instead pay federal income or excise taxes on this income
at the Fund level. The amount of such distributions, if any, is expected to be
small.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of the Fund.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund
intends, as a matter of policy, to declare and pay such dividends, if any, in
December to avoid the imposition of this tax, but does not guarantee that its
distributions will be sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be disallowed to the
extent of exempt interest dividends paid with respect to such shares. However,
since the Fund seeks to maintain a stable $1.00 share price for both purchases
and redemptions, shareholders are not expected to realize a capital gain or loss
upon sale.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until February 29, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Fund's directors who are not parties to the underwriting
agreement or interested persons of any such party (other than as directors of
the Fund), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
General Information
Performance
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate its past performance.
Current Yield
Current yield reflects the interest income per share earned by the Fund's
portfolio investments.
Current yield is computed by determining the net change, excluding capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then annualizing the result by multiplying the base period
return by (365/7).
The yield for the Fund for the seven-day period ended on July 31, 1995 was
3.09%.
Effective Yield
Effective yield is computed in the same manner except that the annualization of
the return for the seven-day period reflects the results of compounding by
adding one to the base period return, raising the sum to a power equal to 365
divided by seven, and subtracting one from the result.
Effective yield for the Fund for the seven-day period ended on the July 31, 1995
was 3.14%.
This figure was obtained using the SEC formula:
Effective Yield = [(Base Period Return + 1)365/7]-1
Tax Equivalent Yield
The Fund may also quote tax equivalent yield and tax equivalent effective yield
which demonstrate the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund which invests in tax-exempt obligations. Such
yields are computed by dividing that portion of the yield of the Fund (computed
as indicated above) which is tax-exempt by one minus the highest applicable
income tax rate and adding the product to that portion of the yield of the Fund
that is not tax-exempt, if any. The tax equivalent yield based on the current
yield of the Fund for the seven-day period ended on July 31, 1995 was 5.12%. The
tax equivalent effective yield based on the effective yield of the Fund for the
seven-day period ended on July 31, 1995 was 5.20%. The advertised tax-equivalent
yield will reflect the most current federal tax rates available to the Fund.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:
a) IBC/Donoghue's Money Fund Report(R) - Industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
b) Bank Rate Monitor - A weekly publication which reports various bank
investments such as CD rates, average savings account rates and average loan
rates.
c) Lipper - Mutual Fund Performance Analysis, Lipper Fixed-Income Fund
Performance Analysis, and Lipper Mutual Fund Yield Survey - measure total return
and average current yield for the mutual fund industry and rank individual
mutual fund performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
d) Salomon Brothers Bond Market Roundup - A weekly publication which reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and reserve
aggregates.
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. These advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in the Fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition, there can be no assurance that the Fund will continue this
performance as compared to such other averages.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Other Features and Benefits
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
costs and/or other long-term goals. The Franklin College Costs Planner may
assist an investor 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 costs estimates are based upon
current costs published by the College Board.) The Franklin Retirement Income
Planning Guide leads an investor through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 47 years and now services
more than 2.4 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 Worldwide, Inc., a pioneer in international
investing. Together, the Franklin Templeton Group has over $129 billion in
assets under management for more than 3.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Group of Funds and the Templeton
Group of Funds offer to the public 114 U.S.-based mutual funds. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the Internal Revenue Service in response
to a Notice of Levy.
Financial Statements
The financial statements contained in the Annual Report to Shareholders of the
Fund dated July 31, 1995, incuding the auditor's report, are incorporated herein
by reference.
Appendix
Municipal Bonds
Moody's
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Municipal bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its municipal bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Municipal bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A: Municipal bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit 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.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: (highest quality) The obligor has an extraordinary ability to pay
interest and repay principal which in unlikely to be affected by reasonably
foreseeable events.
AA bonds: (high quality) The obligor's ability to pay interest and repay
principal, while very strong, is somewhat less than for AAA-rated securities or
more subject to possible change over the term of the issue.
A bonds: (good quality) The obligor's ability to pay interest and repay
principal is strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB bonds: (satisfactory bonds) The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to weaken this ability than bonds
with higher ratings.
Municipal Notes
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, while various 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
broadbased 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 usually will be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A plus (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's Short-term and Commercial Paper Ratings
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. Reflects 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.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
