Prospectus & Application
Franklin
Tax-Exempt Money Fund
INVESTMENT STRATEGY
TAX-FREE INCOME
DECEMBER 1, 1998
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUND
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INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
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2 Goals and Strategies
3 Main Risks
5 Performance
6 Fees and Expenses
7 Management
8 Distributions and Taxes
10 Financial Highlights
YOUR ACCOUNT
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INFORMATION ABOUT ACCOUNT TRANSACTIONS AND SERVICES
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11 Buying Shares
13 Investor Services
16 Selling Shares
19 Account Policies
21 Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
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Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is high current income free from federal
income taxes, consistent with liquidity and capital preservation. The fund
also tries to maintain a stable $1 share price.
PRINCIPAL INVESTMENTS The fund normally invests predominately in
high-quality, short-term municipal securities whose interest is free from
federal income taxes, including the federal alternative minimum tax. Although
the fund tries to invest all of its assets in tax-free securities, it is
possible, although not anticipated, that up to 20% of its assets may be in
securities that pay taxable interest. The fund may invest more than 25% of
its assets in municipal securities that finance similar types of projects,
such as hospitals, housing, industrial development, transportation or
pollution control.
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MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public and private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
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The fund maintains a dollar-weighted average portfolio maturity of 90 days or
less and only buys securities:
o with remaining maturities of 397 days or less, and
o that the manager determines present minimal credit risks and are rated in
the top two ratings (or comparable unrated securities).
The fund may invest a large amount of its assets in variable and floating
rate securities, whose interest rates change either at specific intervals or
whenever a benchmark rate changes. While this feature helps protect against a
decline in the security's market price when interest rates go up, it lowers
the fund's income when interest rates fall.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes unusual or adverse economic, market or other conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goals, because it may not invest or may invest less in tax-free
securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME RISK is the risk that the fund's income will decrease due to falling
interest rates. Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall. Since
the fund limits its investments to high-quality, short-term securities, its
portfolio will generally earn lower yields than a portfolio with
lower-quality, longer-term securities subject to more risk.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect a security's value.
Many of the fund's portfolio securities are supported by credit enhancements
provided by U.S. or foreign entities. These securities have the credit risk
of the entity providing the credit support. Credit support provided by a
foreign entity may be less certain because of the possibility of adverse
foreign economic, political or legal developments that may affect the ability
of that entity to meet its obligations. The fund's ability to maintain a
stable share price may depend on these credit supports, which are not backed
by federal deposit insurance.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates go up, municipal security prices
fall. The opposite is also true: municipal security prices go up when
interest rates fall.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to go up.
The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risks.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Many of the fund's securities
are issued on a when-issued or delayed delivery basis, where payment and
delivery take place at a future date. Since the market price of the security
may fluctuate during the time before payment and delivery, the fund assumes
the risk that the value of the security at delivery may be more or less than
the purchase price.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. The manager, of course, cannot audit
each issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. Please see page 7 for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Although the fund tries to maintain a $1 share price, it is
possible to lose money by investing in the fund.
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[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows the fund's average annual total returns. Of course,
past performance cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
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[]% []% []% []% []% []% []% []% []% []%
88 89 90 91 92 93 94 95 96 97
YEAR
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BEST
QUARTER:
Q2 '89
1.50%
WORST
QUARTER:
Q1 '94
0.41%
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AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
1 YEAR 5 YEARS 10 YEARS
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Franklin Tax-Exempt Money Fund 3.02% 2.62% 3.61%
1. As of September 30, 1998, the fund's year-to-date return was
2.16%.
All fund performance assumes reinvestment of dividends.
To obtain the fund's current yield information, please call 1-800/DIAL BEN.
[insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended July 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees2 0.58%
Distribution and service (12b-1) fees None
Other expenses 0.25%
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Total annual fund operating expenses2 0.83%
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1. There is a $5 fee for each exchange by a market timer (see page 20).
2. For the period shown, the manager had agreed in advance to limit its
management fees. With this reduction, management fees were 0.40% and total
annual fund operating expenses were 0.65%. The manager may end this
arrangement at any time upon notice to the fund's Board of Directors.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$85 $265 $460 $1,025
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $208 billion in assets.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended July 31, 1998, management
fees, before any advance waiver, were 0.58% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.40% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Directors.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME DISTRIBUTIONS The fund typically pays income dividends each day that
its net asset value is calculated. Your account may begin to receive
dividends on the day after we receive your investment and will continue to
receive dividends through the day we receive a request to sell your shares.
The amount of these dividends will vary and there is no guarantee the fund
will pay dividends.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are free from federal income tax. The fund
may, however, invest a portion of its assets in securities that pay taxable
interest. Fund distributions from such taxable interest are taxable to you as
ordinary income. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash.
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BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund
to do so.
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Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
Since the fund expects to maintain a stable $1 share price, you should not
have any gain or loss if you sell your fund shares. For tax purposes, an
exchange of your fund shares for shares of a different Franklin Templeton
Fund is the same as a sale.
Exempt-interest dividends are taken into account when determining the taxable
portion of social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds whose income is a
preference item when determining alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of a
state, or its political subdivisions, generally will be free from that
state's personal income taxes. States do not grant tax-free treatment to
interest from municipal securities of other states. Ordinary income
distributions will generally be subject to state and local income tax.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You
should consult your tax professional about federal, state, local or foreign
tax consequences.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
Year Ended July 31,
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1998 1997 1996 1995 1994
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PER SHARE DATA ($)
Net asset value, beginning of year 1.00 1.00 1.00 1.00 1.00
---------------------------------
Net investment income .029 .029 .029 .029 .02
Distributions from net investment
income (.029) (.029) (.029) (.029) (.02)
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Net asset value, end of year 1.00 1.00 1.00 1.00 1.00
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Total return (%)1 2.99 2.94 2.93 2.98 1.85
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 164,525 161,038 166,713 173,123 202,883
Ratios to average net assets: (%)
Expenses 0.65 0.65 0.65 0.65 0.65
Expenses excluding waiver and
payments by affiliate 0.83 0.80 0.81 0.78 0.87
Net investment income 2.94 2.91 2.88 2.65 1.84
1. Total return is not annualized.
YOUR ACCOUNT
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and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
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Regular accounts $1,000 $50
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UGMA/UTMA accounts $100 $50
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Broker-dealer sponsored
wrap account programs $250 $50
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Full-time employees, officers,
trustees and directors of
Franklin Templeton entities,
and their immediate family
members $100 $50
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Many of the fund's investments must be paid for in federal funds, which are
monies held by the fund's custodian on deposit at the Federal Reserve Bank of
San Francisco and elsewhere. The fund generally cannot invest money it
receives from you until it is available to the fund in federal funds, which
may take up to two days. Until then, your purchase may not be considered in
proper form. If the fund is able to make investments immediately (within one
business day), it may accept your order with payment in other than federal
funds.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see page 13).
BUYING SHARES
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
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shaking]
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATIVE representative representative
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[Insert graphic of Make your check, Federal Make your check payable
envelope] Reserve Draft or to Franklin Tax-Exempt
negotiable bank draft Money Fund. Include your
BY MAIL payable to Franklin account number on the
Tax-Exempt Money Fund. check.
Instruments drawn on
other mutual funds may Fill out the deposit
not be accepted. slip from your account
statement or checkbook.
Mail the check or draft If you do not have a
and your signed slip, include a note
application to Investor with your name, the fund
Services. name, and your account
number.
Mail the check and
deposit slip or note to
Investor Services.
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[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE Wire the funds to Bank of Wire the funds to Bank
America, ABA routing of America, ABA routing
1-800/632-2301 (or number 121000358, for number 121000358, for
1-650/312-2000 collect) credit to Franklin credit to Franklin
Tax-Exempt Money Fund, Tax-Exempt Money Fund,
To make a same day wire A/C 1493-3-04779. Your A/C 1493-3-04779. Your
investment, please make name and wire control name and wire control
sure we receive your number must be included. number must be included.
order by 3:00 p.m.
pacific time. Mail your signed
application to Investor
Services. Please include
the wire control number
or your new account
number on the application.
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[Insert graphic of two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] send signed written below or our automated
instructions. The TeleFACTS system, or
BY EXCHANGE TeleFACTS system cannot send signed written
be used to open a new instructions.
TeleFACTS(R) account.
1-800/247-1753 (Please see page 15 for
(around-the-clock access) (Please see page 15 for information on
information on exchanges.) exchanges.)
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777, SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in the
fund by transferring money from your paycheck to the fund by electronic funds
transfer. If you are interested, indicate on your application that you would
like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the fund or in the same share class of another
Franklin Templeton Fund. Any initial sales charges or contingent deferred
sales charges (CDSCs) will not apply if you reinvest your distributions
within 365 days. You can also have your distributions deposited in a bank
account, or mailed by check. Deposits to a bank account may be made by
electronic funds transfer.
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The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc. and Templeton Variable Product Series Fund.
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Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund. If you choose not
to reinvest your distributions in the fund, the fund will distribute
distributions paid during the month as directed on the last business day of
each month.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
CHECK WRITING PRIVILEGES You may request redemption drafts (checks) free of
charge on your account application or, for an existing account, by calling
our TeleFACTS system. Check writing privileges allow you to write checks
against your account and are available unless you hold share certificates.
For security reasons and reasons related to the requirements of check
processing systems, the fund can only accept checks ordered from the fund.
The fund cannot be responsible for any check not ordered from the fund that
is returned unpaid to the payee.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*. The fund's shares are considered Class I shares
for exchange and other purposes. If you exchange shares from the fund to
another Franklin Templeton Fund, a sales charge may apply unless you acquired
your fund shares by exchange or through the reinvestment of dividends, or you
otherwise qualify to buy shares without an initial sales charge.
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An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
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Generally, exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 20).
*Advisor Class shareholders of other Franklin Templeton Funds and certain
Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into
the fund. These shareholders may later exchange their fund shares for Advisor
Class shares of another fund, if they otherwise qualify to buy Advisor Class
shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, please call Investor Services at 1-800/632-2301.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $50,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
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A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
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o you are selling more than $50,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING SHARES BY CHECK For accounts with check writing privileges, you may
make checks payable to any person and for any amount of $100 or more. Since
you will not know the exact amount in your account on the day a check clears,
a check should not be used to close your account.
When a check is presented for payment, we will redeem an equivalent number of
shares in your account to cover the amount of the check. The shares will be
redeemed at the net asset value next determined after we receive the check,
as long as the check does not exceed the collected balance in your account.
If a check is presented for payment that exceeds the collected balance in
your account, the bank may return the check unpaid.
The checks are drawn through Bank of America NT & SA. Bank of America may end
this service at any time upon notice to you. You generally will not be able
to convert a check drawn on your fund account into a certified or cashier's
check by presenting it at the bank. Since the fund is not a bank, the fund
cannot assure that a stop payment order you write will be effective. The fund
will use its best efforts, however, to see that these orders are carried out.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
CONTINGENT DEFERRED SALES CHARGE (CDSC) Most Franklin Templeton Funds impose
a 1% CDSC on certain Class I shares sold within 12 months of purchase. While
the fund generally does not have a CDSC, it will impose one if you sell
shares exchanged into the fund from another Franklin Templeton Fund and those
shares would have been assessed a CDSC in the other fund. Please keep in mind
that the time the shares are held in the Franklin Tax-Exempt Money Fund does
not count towards the CDSC holding period.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. To keep your CDSC as low as
possible, we will first sell any shares in your account that are not subject
to a CDSC. If there are not enough of these to meet your request, we will
sell the shares in the order they were purchased.
SELLING SHARES
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TO SELL SOME OR ALL OF YOUR SHARES
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[Insert graphic of hands
shaking]
Contact your investment
THROUGH YOUR INVESTMENT representative
REPRESENTATIVE
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[Insert graphic of Send written instructions and envelope]
endorsed share certificates
BY MAIL (if you hold share certificates) to
Investor Services. Corporate, partnership
or trust accounts may need to send
additional documents.
Specify the fund, the account number and
the dollar value or number of shares you
wish to sell. Be sure to include all
necessary signatures and any additional
documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
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BY PHONE As long as your transaction is for
$50,000 or less, you do not hold
1-800/632-2301 share certificates and you have not
changed your address by phone within the
last 15 days, you can sell your shares by
phone.
A check will be mailed to the name(s) and
address on the account. Written
instructions, with a signature guarantee,
are required to send the check to another
address or to make it payable to another
person.
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[Insert graphic of three You can call or write to have
lightening bolts) redemption proceeds of $1,000
or more wired to a bank or
BY WIRE escrow account. See the policies above
for selling shares by mail or phone.
Before requesting a wire, please make
sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and address, your bank account
number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 3:00
p.m. pacific time will be wired the next
business day. Requests received in proper
form by 9:00 a.m. pacific time may be
wired to an escrow account the same day.
[Insert graphic of two Obtain a current prospectus for
arrows pointing in opposite the fund you are considering
directions]
Call Shareholder Services at
BY EXCHANGE the number below or our
automated TeleFACTS system, or send
TeleFACTS(R) signed written instructions. See
1-800/247-1753 the policies above for selling
(around-the-clock access) shares by mail or phone.
If you hold share certificates, you will
need to return them to the fund before
your exchange can be processed.
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FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777, SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE When you buy and sell fund shares, you pay the net
asset value (NAV) per share. The fund calculates its NAV per share at 3:00
p.m. pacific time, each day the New York Stock Exchange is open, by dividing
its net assets by the number of shares outstanding. The fund's assets are
generally valued at their amortized cost.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o If you buy shares with a check or draft that is returned to the fund
unpaid, the fund may impose a $10 charge against your account for each
returned item.
o When you buy shares, it does not create a checking or other bank account
relationship with the fund or any bank.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right
to make payments in securities or other assets of the fund, in the case
of an emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act File #811-3193114 P 12/98
FRANKLIN
TAX-EXEMPT
MONEY FUND
STATEMENT OF
ADDITIONAL INFORMATION
DECEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
- ------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated December 1, 1998, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended July 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies .................................................. 2
Officers and Directors ................................................ 7
Management and Other Services ......................................... 10
Portfolio Transactions ................................................ 12
Distributions and Taxes ............................................... 12
Organization, Voting Rights and
Principal Holders .................................................... 13
Buying and Selling Shares ............................................. 14
Pricing Shares ........................................................ 16
The Underwriter ....................................................... 17
Performance ........................................................... 17
Miscellaneous Information ............................................. 18
Description of Ratings
for Municipal Securities ............................................. 19
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
The fund's investment goal is high current income free from federal income
taxes, consistent with liquidity and capital preservation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Of course, there is no assurance that the fund will meet its goal. The fund
also tries to maintain a stable $1 share price. Except as noted, the fund's
investment policies discussed in this SAI are fundamental and may not be
changed without shareholder approval.
As a fundamental policy, the fund normally invests at least 80% of its assets
in securities that pay interest free from federal income taxes, including the
federal alternative minimum tax. As a nonfundamental policy, the fund tries
to invest all of its assets in tax-free municipal securities. The issuer's
bond counsel generally gives the issuer an opinion on the tax-exempt status
of a municipal security when the security is issued.
Below is a description of various types of municipal and other securities
that the fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which the fund may
also invest, if consistent with its investment goals and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
are issued in expectation of the receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing Program.
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs. The
fund may invest in unrated tax-exempt commercial paper only if the issuer has
an outstanding debt security rated in one of the two highest rating
categories.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge, if any,
of the facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES The fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
The fund's investment in variable or floating rate securities is subject to
certain rules under federal securities laws on the quality and maturity of
the securities and to procedures adopted by the fund's Board of Directors and
designed to minimize credit risks. The fund may invest in variable or
floating rate securities with stated maturities of more than one year, if the
securities carry demand features that comply with certain conditions and
rules. The policies in this paragraph are not fundamental.
MUNICIPAL LEASE OBLIGATIONS The fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations finance the purchase of public property. The property is leased
to the state or a local government, and the lease payments are used to pay
the interest on the obligations. Municipal lease obligations differ from
other municipal securities because the lessee's governing body must set aside
the money to make the lease payments each year. If the money is not set
aside, the issuer or the lessee can end the lease without penalty. If the
lease is cancelled, investors who own the municipal lease obligations may not
be paid.
The fund's Board of Directors reviews the fund's municipal lease obligations
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board. These factors include (a)
the credit quality of the obligations and the extent to which they are rated
or, if unrated, comply with existing criteria and procedures followed to
ensure that they are comparable in quality to the ratings required for the
fund to invest, including an assessment of the likelihood of the lease being
canceled, taking into account how essential the leased property is and the
term of the lease compared to the useful life of the leased property; (b) the
size of the municipal securities market, both in general and with respect to
municipal lease obligations; and (c) the extent to which the type of
municipal lease obligations held by the fund trade on the same basis and with
the same degree of dealer participation as other municipal securities of
comparable credit rating or quality. The policies in this paragraph are not
fundamental.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest.
CALLABLE BONDS The fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. The manager may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. A call of some or all of these securities may lower the fund's
income and its distributions to shareholders. If the fund originally paid a
premium for the bond because it had appreciated in value from its original
issue price, the fund also may not be able to recover the full amount it paid
for the bond. One way for the fund to protect itself from call risk is to buy
bonds with call protection. Call protection is an assurance that the bond
will not be called for a specific time period, typically five to 10 years
from when the bond is issued.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the fund's callable bonds
may impact the fund's net asset value. Based on a number of factors,
including certain portfolio management strategies used by the manager, the
fund believes it has reduced the risk of an adverse impact on its net asset
value from calls of callable bonds. In light of the fund's pricing policies
and certain amortization procedures required by the Internal Revenue Service
(IRS), the fund does not expect to suffer any material adverse impact related
to the value at which it has carried the bonds in connection with calls of
bonds purchased at a premium. As with any investment strategy, however, there
is no guarantee that a call may not have a more substantial impact than
anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies
and instrumentalities of the U.S. government and are backed by the full faith
and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The fund may invest in taxable commercial paper only
for temporary defensive purposes.
WHEN-ISSUED TRANSACTIONS Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its net asset value. The fund believes that
its net asset value or income will not be negatively affected by its purchase
of municipal securities on a when-issued basis. The fund will not engage in
when-issued transactions for investment leverage purposes (this policy is not
fundamental).
Although the fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
fund is the buyer, it will maintain cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. If assets
of the fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets. The policies in
this paragraph are not fundamental.
ILLIQUID INVESTMENTS The fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are generally securities that cannot
be sold within seven days in the normal course of business at approximately
the amount at which the fund has valued them, and include securities subject
to legal or contractual restrictions on resale.
REPURCHASE AGREEMENTS Although the fund currently has no intention of doing so,
it may enter into repurchase agreements. Under a repurchase agreement, the fund
agrees to buy U.S. government securities from a bank or broker-dealer (the
seller) and then to sell the securities back to the bank or broker-dealer after
a short period of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the repurchase price, and is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. Repurchase agreements may involve risks in
the event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to sell the underlying securities. The fund
may enter into repurchase agreements only with parties who meet creditworthiness
standards approved by the fund's Board of Directors, i.e., banks or
broker-dealers that the manager has determined present no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase agreement.
The fund does not invest in repurchase agreements with a term or more than
one year. The securities underlying a repurchase agreement may, however, have
maturity dates longer than one year from the effective date of the repurchase
agreement. The fund may not enter into a repurchase agreement with a term of
more than seven days if, as a result, more than 10% of the fund's net assets
would be invested in such repurchase agreements and other illiquid securities.
DIVERSIFICATION The fund is a diversified fund. It follows certain procedures
required by federal securities laws with respect to the diversification of
its investments. The fund also intends to meet certain diversification
requirements for tax purposes. Diversification involves limiting the amount
of money invested in any one issuer or, on a broader scale, in any one state
or type of project to help spread and reduce the risks of investment.
For the purpose of diversification, each political subdivision, agency, or
instrumentality of a state, each multi-state agency of which a state is a
member, and each public authority that issues private activity bonds on
behalf of a private entity, is considered a separate issuer. Escrow-secured
or defeased bonds are not generally considered an obligation of the original
municipality when determining diversification. For securities backed only by
the assets or revenues of a particular instrumentality, facility or
subdivision, the entity is considered the issuer.
TEMPORARY INVESTMENTS When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest the fund's portfolio in a
temporary defensive manner. Under these circumstances, the fund may invest
all of its assets in securities that pay taxable interest, including
(i) high quality commercial paper; (ii) securities issued or guaranteed by
the full faith and credit of the U.S. government; or (iii) obligations of
U.S. banks with assets of $1 billion or more.
SECURITIES TRANSACTIONS Generally, all of the securities held by the fund are
offered on the basis of a quoted yield to maturity. The price of the security
is adjusted so that, relative to the stated rate of interest, it will return
the quoted rate to the buyer. The maturities of these securities at the time
of issuance generally range between three months to one year.
The frequency of portfolio transactions, usually referred to as the portfolio
turnover rate, varies from year to year, depending on market conditions.
Generally, the fund's policy is to hold securities in its portfolio until
they mature. Due to the short-term nature of the maturities of the securities
in the fund's portfolio, the fund does not expect to have any reportable
annual portfolio turnover.
CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay
as compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc., Moody's Investors Service,
Inc., and Standard & Poor's Corporation (S&P), often rate municipal
securities based on their opinion of the issuer's credit quality. Most rating
agencies use a descending alphabet scale to rate long-term securities, and a
descending numerical scale to rate short-term securities. These ratings are
described at the end of this SAI under "Description of Ratings for Municipal
Securities."
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
As discussed in the fund's prospectus, the fund only buys securities that the
manager determines present minimal credit risks and that are rated in one of
the top two ratings or that are comparable unrated securities in the
manager's opinion. In addition to considering ratings in its selection of
portfolio securities, the manager considers, among other things, information
about the financial history and condition of the issuer, revenue and expense
prospects and, in the case of revenue bonds, the financial history and
condition of the source of revenue to service the bonds. Securities that
depend on the credit of the U.S. government are regarded as having a triple A
or equivalent rating.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Purchase the securities of any issuer (except the U.S. government, its
agencies or instrumentalities or securities which are backed by the full
faith and credit of the U.S.) 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 goals, 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 by (i) the purchase of a portion of an issue of debt
securities in accordance with its investment goals, policies, and
restrictions, (ii) engaging in repurchase transactions, and (iii) 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 "Goals and Strategies";
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 U.S. government, its agencies or
instrumentalities) if, as a result, more than 25% of total fund assets
would be invested in any one industry; and
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.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND DIRECTORS
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The fund has a board of directors. The board is responsible for the overall
management of the fund, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
fund who are responsible for administering the fund's day-to-day operations.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S) HELD PRINCIPAL OCCUPATION(S
NAME, AGE AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Director
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Director
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman
of the Board
and Director
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Director
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Director
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities
Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Thomas J. Kenny (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and
Principal
Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Richard C. Stoker (61)
11615 Spring Ridge Rd.
Potomac, MD 20854
Vice President
Senior Vice President, Franklin Templeton Distributors, Inc.; Vice President,
Franklin Management, Inc.; and officer of five of the investment companies in
the Franklin Templeton Group of Funds.
R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The fund pays noninterested board members $100 per month plus $75 per meeting
attended. Board members who serve on the audit committee of the fund and
other funds in the Franklin Templeton Group of Funds receive a flat fee of
$2,000 per committee meeting attended, a portion of which is allocated to the
fund. Members of a committee are not compensated for any committee meeting
held on the day of a board meeting. Noninterested board members may also
serve as directors or trustees of other funds in the Franklin Templeton Group
of Funds and may receive fees from these funds for their services. The fees
payable to noninterested board members by the fund are subject to reductions
resulting from fee caps limiting the amount of fees payable to board members
who serve on other boards within the Franklin Templeton Group of Funds. The
following table provides the total fees paid to noninterested board members
by the fund and by other funds in the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN TEMPLETON
TOTAL FEES RECEIVED FROM THE GROUP OF FUNDS
RECEIVED FRANKLIN TEMPLETON ON WHICH
NAME FROM THE FUND1 GROUP OF FUNDS2 EACH SERVES3
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Frank H. Abbott, III $2,268 $165,937 27
Harris J. Ashton 2,180 344,642 49
S. Joseph Fortunato 2,160 361,562 51
David W. Garbellano4 200 91,317 n/a
Frank W. T. LaHaye 2,268 141,433 27
Gordon S. Macklin 2,180 337,292 49
1. For the fiscal year ended July 31, 1998. During the period from August 1,
1997, through May 31, 1998, fees at the rate of $100 per month plus $100 per
meeting attended were in effect.
2. For the calendar year ended December 31, 1997.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
4. Deceased, September 27, 1997.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is wholly owned by Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the fund's portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the fund, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to a daily rate of:
o 1/584 of 1% of the value of net assets up to and including $100 million;
o 1/730 of 1% of the value of net assets over $100 million up to and
including $250 million; and
o 1/811 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business each day according to the terms
of the management agreement.
For the last three fiscal years ended July 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)1
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1998 644,753
1997 601,542
1996 644,383
1. For the fiscal years ended July 31, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $938,729, $928,704 nd $1,016,591,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund.
FT Services is wholly owned by Resources and is an affiliate of the fund's
manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended July 31, the manager paid FT Services
the following administration fees:
ADMINISTRATION
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FEES PAID ($)
1998 244,094
19971 200,058
1. For the period from October 1, 1996, through July 31, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the fund's Annual Report to Shareholders and
reviews the fund's registration statement filed with the U.S. Securities and
Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the fund does not buy securities in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
Depending on the manager's view of market conditions, the fund may or may not
buy 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 before maturity to meet redemptions or as a result of a revised
evaluation by the manager of the issuer.
During the fiscal years ended July 31, 1998, 1997 and 1996, the fund did not
pay any brokerage commissions.
As of July 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund's daily net income includes
accrued interest and any original issue or acquisition 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 $1 share price), less the estimated
expenses of the fund.
By meeting certain requirements of the tax code, the fund has qualified and
continues to qualify to pay exempt-interest dividends to you. These dividends
are derived from interest income exempt from regular federal income tax, and
are not subject to regular federal income tax when distributed to you. In
addition, to the extent that exempt-interest dividends are derived from
interest on obligations of a state or its political subdivisions, or from
interest on qualifying U.S. territorial obligations (including qualifying
obligations of Puerto Rico, the U.S. Virgin Islands or Guam), they will also
be exempt from that state's personal income taxes. A state generally does not
grant tax-free treatment to interest on state and municipal securities of
other states.
The fund may earn taxable income on any temporary investments or ordinary
income derived from the sale of market discount bonds. Any fund distributions
from such income will be taxable to you as ordinary income, whether you
receive them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Because the
fund is a money fund, it does not anticipate realizing any long term capital
gains.
MAINTAINING A $1 SHARE PRICE Gains and losses on the sale of portfolio
securities and unrealized appreciation or depreciation in the value of these
securities may require the fund to adjust distributions in order to maintain
a $1 share price. These procedures may result in under- or over-distributions
of net investment income.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year, including the
portion of the distributions that on average comprise taxable income or
interest income that is a tax preference item under the alternative minimum
tax. If you have not held fund shares for a full year, you may have
designated as taxable or tax-exempt or as a tax preference a percentage of
income that is not equal to the actual amount of such income earned during
the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the tax
code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the
fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of the fund's available earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS The tax code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January of the following year that are treated by you as
received in December of the prior year) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. Because the
fund tries to maintain a stable $1 share price, you should not expect to
realize a capital gain or loss upon the sale or exchange of your shares.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the fund for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while still exempt from regular federal income tax, is a
preference item for taxpayers when determining their alternative minimum tax
under the tax code and under the income tax provisions of several states.
Private activity bond interest could subject you to or increase your
liability under federal and state alternative minimum taxes, depending on
your individual or corporate tax position. Persons who are defined in the tax
code as substantial users (or persons related to such users) of facilities
financed by private activity bonds should consult with their tax advisors
before buying fund shares.
ORGANIZATION, VOTING RIGHTS
AND PRINCIPAL HOLDERS
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The fund is a no-load, 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. Each share of the fund has
one vote and all shares have equal voting, participation and liquidation
rights. Shares of the fund are considered Class I shares for redemption,
exchange and other purposes.
The fund has cumulative voting rights. For board member elections, this means
the number of votes you will have is equal to the number of shares you own
times the number of board members to be elected. You may cast all of your
votes for one candidate or distribute your votes between two or more
candidates.
The fund does not intend to hold annual shareholder meetings. The fund may
hold special meetings, however, for matters requiring shareholder approval. A
meeting may be called by the board to consider the removal of a board member
if requested in writing by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a board member. A
special meeting may also be called by the board in its discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the fund's outstanding shares.
As of September 11, 1998, the officers and board members, as a group, owned
of record and beneficially less than 1% of the fund's outstanding shares. The
board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
The investment authority of certain investors may be restricted by law. If
you are such an investor, you should consult your legal advisor to determine
whether and to what extent shares of the fund are legal investments for you.
If you are a municipal investor considering investing proceeds of bond
offerings, you should consult with expert counsel to determine the effect, if
any, of payments by the fund on arbitrage rebate calculations.
All purchases of fund shares will be credited to you, in full and fractional
shares of the fund (rounded to the nearest 1/100 of a share), in an account
maintained for you by the fund's transfer agent. No share certificates will
be issued for fractional shares at any time and no share certificates will be
issued to you if you have elected to redeem shares by check or by
preauthorized bank or brokerage firm account methods. The offering of fund
shares may be suspended at any time and resumed at any time thereafter.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars, drawn on a U.S. bank,
and are accepted subject to collection at full face value. Checks drawn in
U.S. funds on foreign banks will not be credited to your account and
dividends will not begin accruing until the proceeds are collected, which may
take a long period of time. We may, in our sole discretion, either (a) reject
any order to buy or sell shares denominated in any other currency or (b)
honor the transaction or make adjustments to your account for the transaction
as of a date and with a foreign currency exchange factor determined by the
drawee bank.
DEALER COMPENSATION Distributors and/or its affiliates provide financial
support to various securities dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of
sales of fund shares. The amount of support may be affected by: total sales;
net sales; levels of redemptions; the proportion of a securities dealer's
sales and marketing efforts in the Franklin Templeton Group of Funds; a
securities dealer's support of, and participation in, Distributors' marketing
programs; a securities dealer's compensation programs for its registered
representatives; and the extent of a securities dealer's marketing programs
relating to the Franklin Templeton Group of Funds. Financial support to
securities dealers may be made by payments from Distributors' resources, from
Distributors' retention of underwriting concessions and, in the case of funds
that have Rule 12b-1 plans, from payments to Distributors under such plans.
In addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If a substantial number of shareholders should, within a
short period, sell their fund shares under the exchange privilege, the fund
might have to sell portfolio securities it might otherwise hold and incur the
additional costs related to such transactions.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. There are no service charges for establishing or maintaining a
systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. If a withdrawal amount exceeds the value of your account, your account
will be closed and the remaining balance in your account will be sent to you.
Because the amount withdrawn under the plan may be more than your actual
yield or income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the Securities and
Exchange Commission (SEC). In the case of redemption requests in excess of
these amounts, the board reserves the right to make payments in whole or in
part in securities or other assets of the fund, in case of an emergency, or
if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by
law. Neither the fund nor its agents shall be liable to you or any other
person if, for any reason, a redemption request by wire is not processed as
described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions may also charge a fee for their services
directly to their clients.
Investor Services may charge you separate fees, negotiated directly with you,
for providing special services in connection with your account, such as
processing a large number of checks each month. Fees for special services
will not increase the expenses borne by the fund.
Special procedures have been designed for banks and other institutions
wishing to open multiple accounts. An 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.
The fund will provide to each institution, on a quarterly basis or more
frequently if requested, a statement setting forth each sub-account's share
balance, income earned for the period, income earned for the year to date,
and total current market value.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims
of ownership or authority to control your account, the fund has the right
(but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
PRICING SHARES
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When you buy and sell fund shares, you pay the net asset value (NAV) per
share. The value of a mutual fund is determined by deducting the fund's
liabilities from the total assets of the portfolio. The net asset value per
share is determined by dividing the net asset value of the fund by the number
of shares outstanding.
The fund calculates its NAV as of 3:00 p.m. pacific time, each day the New
York Stock Exchange (NYSE) is open for trading. The fund does not calculate
its NAV on days the NYSE is closed for trading, which include New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The valuation of the fund's portfolio securities, including any securities held
in a separate account maintained for when-issued securities, is based on the
amortized cost of the securities, which does not take into account unrealized
capital gains or losses. This method 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 but 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 an
investment in a fund utilizing only market values, and existing investors in the
fund would receive less investment income. The opposite would be true in a
period of rising interest rates.
The fund's use of amortized cost, which helps the fund maintain its net asset
value per share of $1, is permitted by a rule adopted by the SEC. Under this
rule, the fund must adhere to certain conditions. The fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less and only buy
instruments having remaining maturities of 397 calendar days or less. The
fund must also invest only in those U.S. dollar-denominated securities that
the fund's board determines present minimal credit risks and that are rated
in one of the two highest rating categories by nationally recognized rating
services, or if unrated are deemed comparable in quality, or are instruments
issued by an issuer that, with respect to an outstanding issue of short-term
debt that is comparable in priority and protection, has received a rating
within the two highest rating categories. Securities subject to floating or
variable interest rates with demand features that comply with applicable SEC
rules may have stated maturities in excess of one year.
The board has established procedures designed to stabilize, to the extent
reasonably possible, the fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
fund's holdings by the board, at such intervals as it may deem appropriate,
to determine if the fund's net asset value calculated by using available
market quotations deviates from $1 per share based on amortized cost. The
extent of any deviation will be examined by the board. If a deviation exceeds
1/2 of 1%, the board will promptly consider what action, if any, will be
initiated. If the board determines that a deviation exists that may result in
material dilution or other unfair results to investors or existing
shareholders, it will take corrective action that it regards as necessary and
appropriate, which may include selling portfolio instruments before maturity
to realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends, redeeming shares in kind, or establishing a net asset
value per share by using available market quotations.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
For the fiscal years ended July 31, 1998, 1997 and 1996, Distributors
received $0, $0 and $1,571, respectively, in connection with redemptions or
repurchases of fund shares.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Current and effective yield quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
CURRENT YIELD shows the income per share earned by the fund. It is calculated
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. The result is then annualized by multiplying the base period
return by (365/7). The fund's current yield for the seven day period ended
July 31, 1998, was 2.89%.
EFFECTIVE YIELD The fund's effective yield is calculated in the same manner
as its current yield, except the annualization of the return for the seven
day period reflects the results of compounding. The fund's effective yield
for the seven day period ended July 31, 1998, was 2.93%.
This figure was obtained using the following SEC formula:
365/7
Effective Yield = [(Base Period Return + 1) ]-1
TAXABLE-EQUIVALENT YIELDS The fund may also quote a taxable-equivalent yield
and a taxable-equivalent effective yield that show the before-tax yield that
would have to be earned from a taxable investment to equal the yield. These
yields are computed by dividing the portion of the yield that is tax-exempt
by one minus the highest applicable federal income tax rate and adding the
product to the portion of the yield that is not tax-exempt, if any. The
taxable-equivalent yield based on the current yield for the seven day period
ended July 31, 1998, was 4.78%. The taxable-equivalent effective yield based
on the effective yield for the seven day period ended July 31, 1998, was
4.85%.
As of July 31, 1998, the federal income tax rate upon which the
taxable-equivalent yield quotations were based was 39.6%. From time to time,
as any changes to the rate become effective, taxable-equivalent yield
quotations advertised by the fund will be updated to reflect these changes.
The fund expects updates may be necessary as tax rates are changed by the
federal government. The advantage of tax-free investments, like the fund,
will be enhanced by any tax rate increases. Therefore, the details of
specific tax increases may be used in sales material for the fund.
OTHER PERFORMANCE QUOTATIONS The fund may include in its advertising or sales
material information relating to investment goals and performance results of
funds belonging to the Franklin Templeton Group of Funds. Franklin Resources,
Inc. is the parent company of the advisors and underwriter of the Franklin
Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
a) IBC 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 that 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 that 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.
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 annual amount of time the average taxpayer works to satisfy his
or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
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The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $208 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS FOR
MUNICIPAL SECURITIES
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MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
that begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
STANDARD & POOR'S CORPORATION (S&P)
AAA: Municipal bonds rated AAA are the highest-grade obligations. They
possess the ultimate degree of protection as to principal and interest. In
the market, they move with interest rates and, hence, provide the maximum
safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
Plus (+) or minus (-): The ratings from "AA" to "BBB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service requirements.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA category.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing; factors of the first importance in
long-term borrowing risk are of lesser importance in the short run. Symbols
used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal
paper investments, are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
