SHAREHOLDER LETTER
Your Fund's Goal: Franklin Tax-Exempt Money Fund seeks to provide a high level
of current income, consistent with liquidity and preservation of capital. The
fund pursues a conservative investment policy by limiting its investments to
high quality securities as it seeks to maintain a $1.00 share price.(1)
Dear Shareholder:
It's a pleasure to bring you Franklin Tax-Exempt Money Fund's semiannual report
for the period ended January 31, 2000.
For the six months under review, domestic economic growth accelerated well above
the Federal Reserve Board's (the Fed's) targeted 3.00% long-term growth rate.
Real gross domestic product (GDP) grew at blistering annualized rates of 5.7%
and 6.9% for the third and fourth quarters of 1999, respectively. Higher equity
and real estate prices, increasing wages and a tight labor market spurred
consumer spending, while a rebound in the manufacturing sector and improving
international economic fundamentals also contributed to the expanding domestic
economy. However, this growth led to a moderate rise in inflation during the
reporting period, as measured by the Consumer Price Index's (CPI's) increase
from 2.1% in July 1999, to 2.7% in January 2000.
1. There is no assurance that the fund's $1.00 per share price will be
maintained. An investment in the fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government organization.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 5 of
this report.
CONTENTS
Shareholder Letter ............. 1
Performance Summary ............ 3
Financial Highlights &
Statement of Investments ....... 4
Financial Statements ........... 10
Notes to
Financial Statements ........... 13
[ GRAPHIC OMITTED ]
The Fed responded to this strong growth and slightly higher inflation by
increasing the federal funds target rate during the reporting period from 5.00%
to 5.50%. In turn, bond prices dropped but yields rose, a positive outcome for
money market fund shareholders. Reflecting a 50 basis-point increase in the
federal funds target rate, Franklin Tax-Exempt Money Fund's seven-day effective
yield rose from 2.47% on July 31, 1999, to 2.59% on January 31, 2000.
The portfolio's investment strategy continues to emphasize high quality and
liquidity. We manage the fund more conservatively than SEC guidelines require,
seeking to ensure the safety and stability of the fund's principal. For example,
SEC guidelines allow tax-exempt money funds to purchase both first- and
second-tier securities. Franklin purchases only first-tier securities for
inclusion in its tax-exempt money market portfolios. Although also allowed by
the SEC for money market funds, we do not buy any derivative securities in our
tax-exempt money funds -- we purchase only plain vanilla, short-term securities.
We eliminated our exposure to Japanese bank guarantees several years ago because
of the problems these banks were having. This philosophy of purchasing
securities only from what we believe are the most creditworthy institutions may
result in lower returns compared to other money funds. However, we feel that the
increased yield offered by lower-rated and less liquid securities does not
justify the added risk to shareholders.
During the reporting period, the fund participated in several attractive deals
including Michigan Municipal Bond Authority Revenue Notes, Iowa School
Corporation Warrants, Clark County Nevada Airport Revenue Mandatory Puts, and
Nassau County, Florida, Solid Waste System Revenue Variable Rate Demand Notes.
Sincerely,
/S/ C. B. Johnson
Charles B. Johnson
Chairman
Franklin Tax-Exempt Money Fund
PERFORMANCE SUMMARY
1/31/00
Seven-day effective yield(1) 2.59%
Seven-day annualized yield 2.56%
Taxable equivalent yield(2) 4.23%
1. The seven-day effective yield assumes the compounding of daily dividends.
2. Taxable equivalent yield assumes the 2000 maximum 39.6% federal personal
income tax rate.
Annualized and effective yields are for the seven-day period ended January 31,
2000. The fund's average weighted maturity was 41 days. Yield reflects
fluctuations in interest rates on portfolio investments, and fund expenses.
Past performance does not guarantee future results.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of January 31, 2000, the end of the reporting period. Our strategies
and the fund's portfolio composition will change depending on market and
economic conditions. Although historical performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
FRANKLIN TAX-EXEMPT MONEY FUND
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, 2000 YEAR ENDED JULY 31,
(unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------
Net investment income ....................... .014 .025 .029 .029 .029 .029
Less distributions from
net investment income ..................... (.014) (.025) (.029) (.029) (.029) (.029)
-------------------------------------------------------------------------------
Net asset value, end of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===============================================================================
Total return(a) ............................. 1.36% 2.49% 2.99% 2.94% 2.93% 2.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $193,861 $190,727 $164,525 $161,038 $166,713 $173,123
Ratios to average net assets:
Expenses ................................... .80%(b) .74% .65% .65% .65% .65%
Expenses excluding waiver and
payments by affiliate .................... .80%(b) .82% .83% .80% .81% .78%
Net investment income ...................... 2.66%(b) 2.46% 2.94% 2.91% 2.88% 2.65%
</TABLE>
(a)Total return is not annualized for periods less than one year.
(b)Annualized
See notes to financial statements.
FRANKLIN TAX-EXEMPT MONEY FUND
Statement of Investments, January 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
INVESTMENTS 119.3%
ARIZONA 3.5%
Pinal County IDA, PCR, Magma-Copper Co., Newmont Mining Corp., Daily VRDN and Put, 3.50%, 12/01/09 .. $6,700,000 $ 6,700,000
------------
DELAWARE 1.5%
Delaware State EDA Revenue, Delaware Clean Power Project, Series C, Weekly VRDN and Put,
3.09%, 8/01/29 .................................................................................... 3,000,000 3,000,000
------------
FLORIDA 4.2%
Florida Local Government Finance Authority Revenue, TECP, 3.65%, 3/16/00 ............................ 5,000,000 5,000,000
Nassau County Solid Waste System Revenue, Refunding, Weekly VRDN and Put, 3.05%, 7/01/13 ............ 3,200,000 3,200,000
------------
8,200,000
------------
GEORGIA 7.2%
De Kalb County Hospital Authority RAN, De Kalb Medical Center Project, Weekly VRDN and
Put, 3.05%, 9/01/09 ............................................................................... 1,700,000 1,700,000
Fulco Hospital Authority Revenue, Anticipation Certificates, Shepherd Center Inc. Project, Weekly
VRDN and Put, 3.00%, 9/01/17 ...................................................................... 1,000,000 1,000,000
Georgia Municipal Electric Authority Revenue, Project One-C, Weekly VRDN and Put, 3.00%, 1/01/20 .... 9,000,000 9,000,000
Macon-Bibb County Hospital Authority Revenue, Certificates, Medical Center of
Central Georgia, Weekly VRDN and Put, 3.05%, 4/01/07 .............................................. 800,000 800,000
Rockdale County Hospital Authority, RAN, Weekly VRDN and Put, 3.05%, 10/01/09 ....................... 1,410,000 1,410,000
------------
13,910,000
------------
ILLINOIS 9.6%
Chicago O'Hare International Airport Revenue, General Airport Second
Lien, Series B, Weekly VRDN and Put, 2.95%, 1/01/15 ............................................... 2,570,000 2,570,000
Illinois State Toll Highway Authority, Toll Highway Priority Revenue, Refunding, Series B,
MBIA Insured, Weekly VRDN and Daily Put, 2.95%, 1/01/10 ........................................... 7,000,000 7,000,000
Illinois Student Assistance Commission Student Loan Revenue, Refunding, MBIA Insured, Weekly
VRDN and Put, 3.05%, 9/01/32 ...................................................................... 9,000,000 9,000,000
------------
18,570,000
------------
INDIANA 2.1%
Fort Wayne Hospital Authority Hospital Revenue, Parkview Memorial Hospital, Series B, Weekly
VRDN and Put, 2.95%, 1/01/16 ...................................................................... 4,100,000 4,100,000
------------
IOWA 6.1%
Iowa Higher Educational Loan Authority Revenue, Higher Education
Facilities, State Ambrose, Weekly VRDN and Daily Put, 3.00%, 10/01/09 ............................. 5,000,000 5,000,000
(a)Iowa School Corporations Warrant Certificates, Iowa School Cash Anticipation
Program, FSA Insured, 4.75%, 2/01/01 .............................................................. 5,000,000 5,033,600
Ottumwa Revenue, Ottumwa Regional Health Center, Weekly VRDN and Put, 3.00%, 10/01/06 ............... 1,775,000 1,775,000
------------
11,808,600
------------
LOUISIANA 2.4%
Louisiana Public Facilities Authority Hospital Revenue, Willis Knighton Medical
Project,
AMBAC Insured, Weekly VRDN and Put, 3.05%, 9/01/27 ............................................... 3,700,000 3,700,000
Refunding, AMBAC Insured, Daily VRDN and Put, 3.05%, 9/01/23 ..................................... 1,000,000 1,000,000
------------
4,700,000
------------
MASSACHUSETTS 14.0%
Massachusetts State GO, Weekly VRDN and Put, 2.85%, 9/01/16 ......................................... 8,500,000 8,500,000
Massachusetts State Health and Educational Facilities Authority Revenue,
Capital Assets Program, Series D, MBIA Insured, Daily VRDN and Put, 3.60%, 1/01/35 ............... 7,000,000 7,000,000
Wentworth Institute of Technology, Series A, AMBAC Insured, Pre-Refunded, 7.40%, 4/01/00 ......... 1,820,000 1,865,078
</TABLE>
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JANUARY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
INVESTMENTS (CONT.)
MASSACHUSETTS (CONT.)
Massachusetts State Water Resources Authority Revenue, sub. lien, Series B, Weekly
VRDN and Put, 2.75%, 8/01/28 ....................................................... $5,000,000 $ 5,000,000
Massachusetts State Water Resources Authority TECP, 3.65%, 3/07/00 ................. 4,900,000 4,900,000
------------
27,265,078
------------
MICHIGAN 1.8%
Michigan Breitung School District, GO, 7.20%, 5/01/00 .............................. 1,500,000 1,510,397
Michigan Municipal Bond Authority Revenue, Series B-2, 4.25%, 8/25/00 .............. 2,000,000 2,007,382
------------
3,517,779
------------
MINNESOTA 1.2%
Maple Grove MFHR, Refunding, Series A, Weekly VRDN and Put, 2.95%, 11/01/31 ......... 2,280,000 2,280,000
------------
MISSOURI 5.2%
Bi-State Development Agency Missouri Illinois Metropolitan District, St. Clair
County Metrolink Extension, Series B, MBIA Insured, Weekly VRDN and Put,
3.00%, 7/01/28 ................................................................... 5,000,000 5,000,000
St. Louis General Fund Revenue, TRAN, 4.00%, 6/30/00 ............................... 5,000,000 5,014,877
------------
10,014,877
------------
NEBRASKA 3.8%
Lancaster County Hospital Authority No. 1 Hospital Revenue, Bryan Memorial
Hospital Project, Refunding, MBIA Insured, Weekly VRDN and Put, 2.95%, 6/01/12 ... 7,300,000 7,300,000
------------
NEVADA 2.1%
Clark County Airport Improvement Revenue, sub. lien,
Series A-1, Weekly VRDN and Put, 2.95%, 7/01/25 ................................. 1,000,000 1,000,000
Series B-1, Mandatory Put, 3.75%, 7/01/00 ....................................... 3,000,000 3,000,000
------------
4,000,000
------------
NEW MEXICO 1.4%
Albuquerque Gross Receipts Lodgers Tax Revenue, Weekly VRDN and Put,
3.00%, 7/01/23 ................................................................... 1,100,000 1,100,000
University of New Mexico Revenue, AMBAC Insured, Weekly VRDN and Put,
2.95%, 6/01/06 ................................................................... 1,600,000 1,600,000
------------
2,700,000
------------
NEW YORK 12.3%
Long Island Power Authority Electric System Revenue, Sub Series 5, Daily VRDN and
Put, 3.55%, 5/01/33 .............................................................. 7,600,000 7,600,000
Nassau County GO, RAN, 4.25%, 3/15/00 .............................................. 3,000,000 3,002,237
New York City HDC, MFR Rental Housing Revenue, One Columbus Place
Development, Series A, Weekly VRDN and Put, 2.70%, 11/15/28 ...................... 1,000,000 1,000,000
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Series C, FGIC Insured, Daily VRDN and Put, 3.60%, 6/15/22 ...................... 100,000 100,000
Series G, FGIC Insured, Daily VRDN and Put, 3.55%, 6/15/24 ...................... 1,200,000 1,200,000
New York City Transitional Finance Authority Revenue, Future Tax Secured, Sub
Series B-1, Daily VRDN and Put, 3.50%, 11/01/27 ................................. 2,600,000 2,600,000
New York State GO, TECP, 3.45%, 3/07/00 ............................................ 5,800,000 5,800,000
New York State Medical Care Facilities Financial Agency Revenue, St. Lukes,
7.45%, 2/15/00 .................................................................. 1,000,000 1,021,279
7.25%, 5/15/00 .................................................................. 1,500,000 1,544,135
------------
23,867,651
------------
</TABLE>
FRANKLIN TAX-EXEMPT MONEY FUND
Statement of Investments, January 31, 2000 (unaudited)(cont.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
Investments (cont.)
North Carolina 3.8%
Raleigh Durham Airport Authority, Special Facility Revenue, Refunding, American
Airlines, Series A, Daily VRDN and Put, 3.60%, 11/01/15 ........................... $4,450,000 $ 4,450,000
Wake County Industrial Facilities and PCFA Revenue, Carolina Power and Light
Co., Series C, Weekly VRDN and Put, 3.00%, 10/01/15 ................................. 2,900,000 2,900,000
---------
7,350,000
---------
Pennsylvania 5.3%
Philadelphia School District GO, TRAN,
Series A, 4.00%, 6/30/00 ......................................................... 6,000,000 6,013,104
Series B, 4.00%, 6/30/00 ......................................................... 1,000,000 1,002,184
Philadelphia Water and Wastewater Revenue, Series B, Weekly VRDN and
Put, 2.95%, 8/01/27 ................................................................. 3,200,000 3,200,000
---------
10,215,288
---------
Puerto Rico 2.9%
Puerto Rico Commonwealth GO, TRAN, Series A-1, 4.50%, 7/30/00 ....................... 5,000,000 5,018,180
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA
Insured, Weekly VRDN and Put, 2.15%, 12/01/15 ....................................... 700,000 700,000
---------
5,718,180
---------
Tennessee 4.3%
Metropolitan Government of Nashville and Davidson County, IDBR, YMCA
Project, Weekly VRDN and Put, 3.00%, 12/01/18 ..................................... 4,800,000 4,800,000
Montgomery County Public Building Authority, Pooled Financing Revenue, Tennessee
County Loan Pool, Weekly VRDN and Daily Put, 3.30%, 11/01/27 ........................ 3,500,000 3,500,000
---------
8,300,000
---------
Texas 17.6%
Brownsville Utility System Revenue, TECP,
3.85%, 2/08/00 ................................................................... 5,000,000 5,000,000
3.65%, 5/17/00 ................................................................... 2,650,000 2,650,000
Greater Texas Student Loan Corp., Student Loan Revenue, Refunding,
Series A, 3.00%, 3/01/00 ......................................................... 8,500,000 8,500,000
Guadalupe Blanco River Authority, PCR, Central Power and Light
Co. Project, Refunding, Daily VRDN and Put, 3.60%, 11/01/15 ....................... 4,300,000 4,300,000
Port Arthur Navigation District IDC, American Petrofina Inc., Daily VRDN and
Put, 3.65%, 5/01/03 ............................................................... 4,550,000 4,550,000
Texas State TRAN, Series A, 4.50%, 8/31/00 .......................................... 9,000,000 9,040,303
---------
34,040,303
---------
Utah 1.9%
Central Utah Water Conservancy District, GO, Tender Option, Series F, Weekly VRDN
and Put, 3.00%, 4/01/27 ........................................................... 3,700,000 3,700,000
---------
Virginia 3.6%
Campbell County IDAR, Exempt Facility, Hadson Power 12, Series A, Daily VRDN and
Put, 3.75%, 4/01/15 ............................................................... 2,400,000 2,400,000
Roanoke IDA Hospital Revenue, Roanoke Memorial Hospital Project, Series C, Weekly
VRDN and Put, 3.00%, 7/01/19 ........................................................ 4,615,000 4,615,000
---------
7,015,000
---------
</TABLE>
FRANKLIN TAX-EXEMPT MONEY FUND
Statement of Investments, January 31, 2000 (unaudited)(cont.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
Investments (cont.)
Washington 1.0%
Seattle Water System Revenue, Weekly VRDN and Put, 2.95%, 9/01/25 .................. $2,000,000 $ 2,000,000
---------
Wisconsin .5%
Wisconsin State Health and Educational Facilities Authority Revenue, Wheaton
Franciscan Services, Weekly VRDN and Put, 3.15%, 8/15/16 ......................... 1,000,000 1,000,000
---------
Total Investments (Cost $231,272,756) 119.3% 231,272,756
Other Assets, less Liabilities (19.3%) (37,411,915)
---------
Net Assets 100.0% $193,860,841
---------
</TABLE>
See glossary of terms on page 9.
(a)Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
FRANKLIN TAX-EXEMPT MONEY FUND
Statement of Investments, January 31, 2000 (unaudited) (cont.)
Glossary of Terms
AMBAC - American Municipal Bond Assurance Corp.
EDA - Economic Development Authority
FGIC - Financial Guaranty Insurance Co.
FSA - Financial Security Assistance
GO - General Obligation
HDC - Housing Development Corp.
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDC - Industrial Development Corp.
IDBR - Industrial Development Board Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
RAN - Revenue Anticipation Note
TECP - Tax-Exempt Commercial Paper
TRAN - Tax Revenue Anticipation Note
VRDN - Variable Rate Demand Note
FRANKLIN TAX-EXEMPT MONEY FUND
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
January 31, 2000 (unaudited)
<S> <C>
Assets:
Investments in securities,at value and cost ............................. $231,272,756
Cash .................................................................... 56,708
Receivables:
Capital shares sold .................................................... 2,786,451
Interest ............................................................... 1,374,887
------------
Total assets ...................................................... 235,490,802
------------
Liabilities:
Payables:
Investment securities purchased ........................................ 5,033,600
Capital shares redeemed ................................................ 36,074,747
Affiliates ............................................................. 138,089
Shareholders ........................................................... 251,928
Distributions to shareholders ........................................... 6,219
Other liabilities ....................................................... 125,378
------------
Total liabilities ................................................. 41,629,961
------------
Net assets,at value ..................................................... $193,860,841
------------
Shares outstanding ...................................................... 193,860,841
------------
Net asset value per share ............................................... $1.00
------------
</TABLE>
See notes to financial statements.
FRANKLIN TAX-EXEMPT MONEY FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
<S> <C>
Investment income:
Interest $3,595,946
----------
Expenses:
Management fees (Note 3) 579,897
Transfer agent fees (Note 3) 118,867
Custodian fees 1,091
Reports to shareholders 61,915
Registration and filing fees 39,728
Professional fees 21,975
Directors' fees and expenses 5,627
Other 3,947
----------
Total expenses 833,047
----------
Net investment income 2,762,899
----------
Net increase in net assets resulting from operations $2,762,899
----------
</TABLE>
See notes to financial statements.
FRANKLIN TAX-EXEMPT MONEY FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
AND THE YEAR ENDED JULY 31, 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JANUARY 31, 2000 JULY 31, 1999
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,762,899 $ 4,327,245
Net realized loss from investments -- (826)
-----------------------------------
Net increase in net assets resulting from operations 2,762,899 4,326,419
Distributions to shareholders from net investment income (2,762,899) (4,326,419)(*)
Capital share transactions:(Note 2) 3,134,108 26,201,598
-----------------------------------
Net increase in net assets 3,134,108 26,201,598
Net assets (there is no undistributed net investment income
at beginning or end of period):
Beginning of period 190,726,733 164,525,135
-----------------------------------
End of period $193,860,841 $190,726,733
-----------------------------------
</TABLE>
(*)Distributions were decreased by net realized losses from securities
transactions of $826 for the year ended July 31, 1999.
See notes to financial statements.
FRANKLIN TAX-EXEMPT MONEY FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Exempt Money Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. The Fund
seeks high current income exempt from federal income taxes, consistent with
capital preservation and liquidity.
The following summarizes the Fund's significant accounting policies.
a. Security Valuation:
Securities are valued at amortized cost which approximates value.
b. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
c. Security Transactions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividends from net
investment income and capital gains or losses are normally declared daily. Such
distributions are reinvested in additional shares of the Fund.
d. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
At January 31, 2000, there were five billion shares authorized (no par value).
Transactions in the Fund's shares at $1.00 per share were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31,2000 July 31,1999
--------------- ------------
<S> <C> <C>
Shares sold $ 812,974,280 $ 534,258,508
Shares issued in reinvestment
of distributions 2,756,193 4,325,631
Shares redeemed (812,596,365) (512,382,541)
------------- -------------
Net increase $ 3,134,108 $ 26,201,598
============= =============
</TABLE>
FRANKLIN TAX-EXEMPT MONEY FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers and directors of the Fund are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/ Templeton Investor Services, Inc.
(Investor Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin Templeton Services Inc. (FT Services), the Fund's investment manager,
transfer agent, principal underwriter, and administrative manager, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
Annualized
Fee Rate Average Daily Net Assets
-------- ------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
4. INCOME TAXES
At July 31, 1999, the Fund had tax basis capital losses of $ 2,439 which may be
carried over to offset future capital gains.
Such losses expire as follows:
Capital loss carryovers expiring in:
2004 $ 595
2005 1,844
------
$2,439
======
At July 31, 1999, the Fund has deferred capital losses occurring subsequent to
October 31, 1998 of $8,419. For tax purposes, such losses will be reflected in
the year ending July 31, 2000.
5. CREDIT RISKS
The Fund has investments in excess of 10% of its total net assets in the states
of Massachusetts, New York, and Texas. Such concentration may subject the Fund
more significantly to economic changes occurring within those states.