Franklin
Federal Tax-Free
Income Fund
PROSPECTUS September 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Federal Tax-Free Income Fund (the "Fund") is a diversified, open-end
management investment company which invests in municipal securities with the
objective of providing as high a level of interest income exempt from federal
income taxes as is consistent with prudent investing, while seeking preservation
of shareholders' capital. Investments in municipal securities will be within the
four highest municipal ratings of either Moody's Investors Service ("Moody's"),
Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or in unrated securities which, in the opinion of the Fund's
investment manager, are of comparable quality to such four highest ratings. (See
"Investment Objective and Policies of the Fund.") Normally, except for temporary
defensive purposes, at least 80% of the Fund's assets will be invested in
municipal securities exempt from regular federal income taxes. There, of course,
can be no guarantee that the Fund's objective will be achieved.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
The Fund offers two classes to its investors: Franklin Federal Tax-Free Income
Fund - Class I ("Class I") and Franklin Federal Tax-Free Income Fund - Class II
("Class II"). Investors can choose between Class I shares, which generally bear
a higher front-end sales charge and lower ongoing Rule 12b-1 distribution fees
("Rule 12b-1 fees"), and Class II shares, which generally have a lower front-end
sales charge and higher ongoing Rule 12b-1 fees. Investors should consider the
differences between the two classes, including the impact of sales charges and
Rule 12b-1 fees, in choosing the more suitable class given their anticipated
investment amount and time horizon. See "How to Buy Shares of the Fund -
Differences Between Class I and Class II."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information (the "SAI") concerning the Fund, dated
September 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
ContentsPage
Expense Table.................................... 3
Financial Highlights............................. 4
About the Fund................................... 5
Investment Objective
and Policies of the Fund........................ 5
Management of the Fund........................... 10
Distributions to Shareholders.................... 12
Taxation of the Fund
and Its Shareholders............................ 14
How to Buy Shares of the Fund.................... 14
Other Programs and Privileges
Available to Fund Shareholders.................. 21
Exchange Privilege............................... 23
How to Sell Shares of the Fund................... 27
Telephone Transactions........................... 30
Valuation of Fund Shares......................... 31
How to Get Information
Regarding an Investment in the Fund............. 32
Performance...................................... 33
General Information.............................. 34
Account Registrations............................ 35
Important Notice Regarding
Taxpayer IRS Certifications..................... 36
Portfolio Operations............................. 36
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on actual
aggregate operating expenses of the Class I shares for the fiscal year ended
April 30, 1995.
<TABLE>
<CAPTION>
Class I Class II
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(as a percentage of offering price)................................................. 4.25% 1.00%++
Deferred Sales Charge................................................................ NONE+ 1.00%++
Exchange Fee (per transaction)....................................................... $5.00* $5.00*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees...................................................................... 0.45% 0.45%
12b-1 Fees........................................................................... 0.07%** 0.65%**
Other Expenses:
Shareholder Servicing Costs........................................................ 0.02% 0.02%
Reports to Shareholders............................................................ 0.03% 0.03%
Other Expenses..................................................................... 0.02% 0.02%
Total Other Expenses................................................................. 0.07% 0.07%***
Total Fund Operating Expenses........................................................ 0.59% 1.17%
</TABLE>
++Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. (See "How to Buy Shares of the Fund - Purchase Price of Fund Shares"
for the definition of Franklin Templeton Funds and similar references.)
+Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month following such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
**Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
***"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended April 30, 1995.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charges, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class I....................................... $48* $61 $74 $113
Class II...................................... $32 $47 $74 $151
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A shareholder would pay the following expenses on the same investment in Class
II shares, assuming no redemption.
<S> <C> <C> <C> <C>
Class II...................................... $22 $47 $74 $151
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of future expenses, which may be more
or less than those shown. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing financial highlights for a Class I share
of the Fund. The information for each of the five fiscal years in the period
ended April 30, 1995 has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the financial statements in the Fund's
Annual Report to Shareholders. The remaining figures, which are also audited,
are not covered by the auditors' current report. Information regarding Class II
shares will be included in this table after they have been offered to the public
for a reasonable period of time. See the discussion "Reports to Shareholders"
under "General Information."
Year ended April 30
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Per Share Operating
Performance*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
year.................... $11.81 12.24 11.68 11.40 11.08 11.33 10.97 11.16 11.64 10.44
Net investment income.... $0.75 0.77 0.80 0.82 0.83 0.84 0.85 0.86 0.92 1.08
Net realized &
unrealized gains
(losses) on securities.. $ (0.053) (0.415) 0.576 0.302 0.342 (0.238) 0.422 (0.118) (0.398) 1.126
Total from investment
operations $.697 0.355 1.376 1.122 1.172 0.602 1.272 0.742 0.522 2.206
Distributions from
net investment
income................. $ (0.777) (0.785) (0.816) (0.842) (0.852) (0.852) (0.912) (0.924) (0.980) (1.006)
Distributions from
realized capital
gains................... $ (0.008) (0.022)
Total Distributions...... $ (0.777) (0.785) (0.816) (0.842) (0.852) (0.852) (0.912) (0.932) (1.002) (1.006)
Net asset value
at end of year $ 11.73 11.81 12.24 11.68 11.40 11.08 11.33 10.97 11.16 11.64
Total Return**........... 6.21% 2.58 11.89 9.90 10.67 5.10 11.71 6.72 4.01 21.76
Year ended April 30
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Ratios/Supplemental Data
Net assets at end
of year (in 000's) $6,886,941 6,804,262 6,414,739 5,184,214 4,353,043 3,865,264 3,648,652 2,839,701 2,407,298 644,134
Ratio of expenses
to average net
assets.................. 0.59% 0.52 0.51 0.51 0.50 0.50 0.51 0.52 0.54 0.64
Ratio of net investment
income to
average net assets...... 6.47% 6.27 6.68 7.07 7.34 7.39 7.59 7.83 7.14 7.72
Portfolio turnover rate.. 19.88% 24.59 13.30 14.94 28.79 17.83 16.43 19.31 19.70 75.51
</TABLE>
*Selected data for a Class I share of capital stock outstanding throughout the
year.
**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends at the maximum offering price and capital gains, if
any, at net asset value.
About the Fund
The Fund, which was incorporated in the State of California in 1982 under the
name of Franklin Cash Management Fund, is a diversified, open-end management
investment company, or mutual fund, and has registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"). Its present
investment objective and policies were adopted in June 1983, and its present
name was adopted in September 1983. The Fund has two classes of shares of
capital stock ("multiclass" structure) with no par value: Franklin Federal
Tax-Free Income Fund - Class I and Franklin Federal Tax-Free Income Fund - Class
II. All Fund shares outstanding before May 1, 1995 have been redesignated as
Class I shares, and will retain their previous rights and privileges, except for
legally required modifications to shareholder voting procedures, as discussed in
"General Information - Voting Rights."
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of Fund Shares"), plus a variable sales charge not exceeding 4.25% of
the offering price depending upon the amount invested. The current public
offering price of the Class II shares is equal to the net asset value, plus a
sales charge of 1% of the amount invested. (See "How to Buy Shares of the
Fund.")
Investment Objective
and Policies of the Fund
The investment objective of the Fund is to provide as high a level of interest
income exempt from federal income taxes as is consistent with prudent investing,
while seeking preservation of shareholders' capital. The Fund seeks to achieve
its objective by investing in a diversified portfolio of municipal securities
that are obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, the
interest on which is exempt from regular federal income tax. The investment
objective of the Fund is a fundamental policy which may not be changed without
shareholder approval. There is, of course, no assurance that the Fund's
objective will be achieved.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. Accordingly, the Fund seeks to invest in municipal securities of
such maturities which, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with prudent investment,
with consideration given to market conditions. Under current market conditions,
the average maturity in the Fund's portfolio is 20-25 years. Generally long-term
bonds are more sensitive to interest rate fluctuations than short-term bonds.
The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest municipal ratings of Moody's (Aaa,
Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB), or in securities
which are not rated, provided that, in the opinion of the Fund's investment
manager, such securities are comparable in quality to those within the four
highest ratings. Bonds rated in the fourth highest category may be considered to
have some speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher rated bonds. In the
event the rating on an issue held in the Fund's portfolio is changed by the
rating service, such change will be considered by the Fund in its evaluation of
the overall investment merits of that security but such change will not
necessarily result in an automatic sale of the security. A description of
municipal securities ratings is contained in the Appendix to the SAI.
Prior to acquiring unrated securities, the investment manager considers the
terms of the offering and various other factors, initially to determine whether
the securities are consistent with the Fund's investment objective and policies,
and thereafter to determine the issuer's comparative credit rating. In making
such determinations, the investment manager may typically (i) interview
representatives of the issuer at its offices, conducting a tour and inspection
of the physical facilities of the issuer in an effort to evaluate the issuer and
its operations, (ii) perform analysis of the issuer's financial and credit
position, including comparisons of all appropriate ratios, and/or (iii) compare
other similar securities offerings to the issuer's proposed offering.
As a fundamental investment policy, with respect to 75% of the Fund's gross
assets, the Fund may not purchase securities of any issuer which would result in
more than 5% of the value of its gross assets being invested in securities of
any one issuer, but this limitation does not apply to investments issued or
guaranteed by the U.S. government or its instrumentalities. With respect to the
remaining 25% of the value of the Fund's gross assets, the Fund may invest in
the securities of as few as one issuer. In determining the issuer of a
tax-exempt security, each state, each political subdivision, agency and
instrumentality of a state, and each multi-state agency of which such state is a
member is a separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility or subdivision, such entity
is considered the issuer. If, however, the creating government or other entity
guarantees a security, such a guarantee would be considered a separate security
and would be treated as an issue of such government or other entity. Up to 25%
of the Fund's assets may be invested in tax-exempt industrial development
revenue bonds or in securities of issuers located in the same state. Percentage
limitations referred to herein and elsewhere in this Prospectus are determined
as of the time an investment or purchase is made.
As a fundamental policy, at least 80% of the Fund's total assets will be
invested in municipal securities the interest income of which is exempt from
regular federal income taxes and, under normal circumstances, the federal
alternative minimum tax. For temporary defensive purposes only, when the
investment manager believes that market conditions, such as rising interest
rates or other adverse factors, would cause serious erosion to the portfolio's
value, the Fund may invest more than 20% of its assets (which could be up to
100%) in fixed-income obligations, the interest on which is subject to regular
federal income tax and/or the federal alternative minimum tax. Any such
temporary taxable investments will be limited to obligations issued or
guaranteed by the full faith and credit of the U.S. government or commercial
paper rated A-1 by S&P, P-1 by Moody's, or F-1+ by Fitch.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to pay principal and interest obligations.
The Fund may invest in variable or floating rate demand notes ("VRDNs") which
carry a demand feature that permits the Fund to tender the obligation back to
the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation. These obligations bear
interest at rates that are not fixed, but that vary with changes in specified
market rates or indices on predesignated dates. Frequently VRDNs are secured by
letters of credit or other credit support arrangements provided by banks.
Because of the demand feature, the prices of VRDNs may be higher and the yields
lower than they otherwise would be for obligations without a demand feature.
With respect to 75% of the total value of a Fund's assets, no more than 5% of
such value may be in securities underlying "puts" from the same institution,
except that the Fund may invest up to 10% of its asset value in unconditional
"puts" (exercisable even in the event of a default in the payment of principal
or interest on the underlying security) and other securities issued by the same
institution.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code") and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal and state
alternative minimum taxes, depending on the shareholder's tax situation. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject a corporate shareholder to, or increase liability under,
the federal alternative minimum tax, because such distributions are included in
the corporation's "adjusted current earnings." In states with a corporate
franchise tax, distributions of the Fund may also be fully taxable to a
corporate shareholder under the state franchise tax system.
Consistent with the Fund's investment objective, the Fund may acquire such
private activity bonds if, in the investment manager's opinion, such bonds
represent the most attractive investment opportunity then available to the Fund.
As of April 30, 1995, the Fund derived 14.92% of its income from bonds, the
interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. A COP is created when long-term lease revenue
obligations are issued by a governmental corporation to pay for the acquisition
of property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the obligations issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs may enable a governmental
issuer to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or in
unrated COPs believed by the Fund's investment manager to be of comparable
quality. Criteria considered by the rating agencies and the Fund's investment
manager in assessing such risk include the issuing municipality's credit rating,
the essentiality of the leased property to the municipality and the term of the
lease compared to the useful life of the leased property. The Board of Directors
reviews the COPs held in the Fund's portfolio to assure that they constitute
liquid investments based on various factors reviewed by the investment manager
and monitored by the Board of Directors. Such factors include (a) the credit
quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of comparable quality to the ratings required for the Fund's
investments, including an assessment of the likelihood that the leases will not
be canceled; (b) the size of the municipal securities market, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
the Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
While there is no limit as to the amount of assets which the Fund may invest in
COPs, as of April 30, 1995, the Fund held 3.71% of the total face amount of the
securities in its portfolio in COPs and other municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call-protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for 5 to 10 years, after which time such bonds may be called away.
An issuer may generally be expected to call its bonds, or a portion of them,
during periods of relatively declining interest rates, when borrowings may be
replaced at lower rates than those obtained in prior years. If the proceeds of a
bond called under such circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of such
bonds included a premium related to the appreciated value of the bonds, some or
all of that premium may not be recovered by bondholders, such as the Fund,
depending on the price at which such bonds were redeemed.
Investment Risk Considerations
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce such risk. There are two
categories of risks to which the Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price. Market risk is the risk of price fluctuation of a municipal
security caused by changes in general economic and interest rate conditions
generally affecting the market as a whole. A municipal security's maturity
length also affects its price. As with other debt instruments, the price of the
debt securities in which the Fund invests are likely to decrease in times of
rising interest rates. Conversely, when rates fall, the value of the Fund's debt
investments may rise. Price changes of debt securities held by the Fund have a
direct impact on the net asset value per share of the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. A list of these restrictions and additional
information concerning the characteristics of municipal securities is included
in the SAI.
How Shareholders Participate in the Results
of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader bond markets. In
particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.
Management of the Fund
The Board of Directors (the "Board") has the primary responsibility for the
overall management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (112 separate series) with aggregate assets of over $76 billion, $40.8
billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended April 30, 1995, management fees totaling 0.45% of
the average monthly net assets of the Fund were paid to Advisers.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded on a "net" basis,
that is, in principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. In the event that the Fund participates
in transactions involving brokerage commissions, it is the Manager's
responsibility to select brokers through whom such transactions will be
effected. The Manager seeks to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to provide the
best execution, the Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data for the Manager and
its affiliates, as well as the sale of shares of the Fund, as factors in
selecting a broker. Further information is included under "The Fund's Policies
Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended April 30, 1995, expenses borne by Class I shares of
the Fund, including fees paid to Advisers and to Investor Services, totaled
0.59% of the average monthly net assets of such class.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plans") pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class will be
based solely on the distribution and servicing fees attributable to that
particular class. Under each Plan the class may reimburse Distributors for
routine ongoing promotion and distribution expenses incurred with respect to
such class. Such expenses may include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
The maximum amount which the Fund may pay to Distributors or others under the
Class I Plan for such distribution expenses is 0.10% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.10% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors, or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
During the first year following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.50% per annum of
Class II's average daily net assets to partially recoup fees Distributors pays
to securities dealers. Distributors, or its affiliates, may pay, from its own
resources, a commission of up to 1% of the amount invested to securities dealers
who initiate and are responsible for shareholders' purchases of Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of each Plan's fees, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distributions To Each Class Of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the last business day of the month, payable on or
about the 15th day of the following month. The amount of income dividend
payments by the Fund is dependent upon the amount of net income received by the
Fund from its portfolio holdings, is not guaranteed and is subject to the
discretion of the Board. Fund shares are quoted ex-dividend on the first
business day following the record date. The Fund does not pay "interest" or
guarantee any fixed rate of return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a taxable dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a return of a portion of
the shareholder's investment, it may be taxable as dividend income or capital
gain.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a front-end
sales charge) on the dividend reinvestment date. Except as otherwise noted
herein, dividend and capital gain distributions are only eligible for
reinvestment at net asset value in the same class of shares of the Fund or the
same class of another of the Franklin Templeton Funds. Shareholders in Class II
funds may, if they choose, direct that their dividends and capital gain
distributions be paid to a Class I Franklin Templeton Money Market Fund.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change will be effective
only as to distributions for which the record date is seven or more business
days after the Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to a Class I
Franklin Templeton Money Market Fund, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Dividends which may be
paid in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department. See "Purchases at Net Asset Value" under "How
to Buy Shares of the Fund."
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled,
"Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, the Fund continues to qualify to
pay exempt-interest dividends to its shareholders. Such exempt-interest
dividends are derived from interest income exempt from regular federal income
tax, and are not subject to regular federal income tax for Fund shareholders.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if paid by the Fund and received by the shareholder on December 31 of the
calendar year in which they are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest dividends on their
federal income tax returns.
Shareholders should consult their tax advisors with respect to the applicability
of state and local intangible property or income taxes to their shares in the
Fund and to distributions and redemption proceeds received from the Fund. For
example, distributions attributable to interest received from, or capital gain
derived from the disposition of, obligations of a given state or its political
subdivisions may be exempt from income taxes in that state.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares.
Differences Between Class I and Class II. The difference between Class I and
Class II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below. Generally, Class I shares have a
higher front-end sales charge than Class II shares and comparatively lower Rule
12b-1 fees. Class II shares have lower front-end sales charges than Class I
shares and comparatively higher Rule 12b-1 fees. Voting rights of each class
will be the same on matters affecting the Fund as a whole, but each will vote
separately on matters affecting its class.
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and not subject to any sales charge upon
redemption. Class I shares are also subject to Rule 12b-1 fees of up to a
maximum of 0.10% per annum of the average daily net assets of Class I. Class I
shares may be purchased at a reduced front-end sales charge or at net asset
value if certain conditions are met. In most circumstances, contingent deferred
sales charges will not be assessed against redemptions of Class I shares. See
"Management of the Fund" and "How to Sell Shares of the Fund" for more
information.
Class II. The current public offering price of Class II shares is equal to the
net asset value, plus a front-end sales charge of 1% of the amount invested.
Class II shares are also subject to a contingent deferred sales charge of 1% if
shares are redeemed within 18 months of the calendar month following purchase.
In addition, Class II shares are subject to Rule 12b-1 fees of up to a maximum
of 0.65% per annum of average daily net assets of such shares, 0.50% of which
will be retained by Distributors during the first year of investment. See
"Contingent Deferred Sales Charge" under "How to Sell Shares of the Fund."
Purchases of Class II shares are limited to purchases below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however, may
be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares.
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in front-end sales charges. For this reason, Class I
shares may be more attractive to long-term investors even if no sales charge
reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares approximately six years or more. Investors who qualify to purchase
Class I shares at reduced sales charges but who intend to hold their shares less
than approximately six years should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value may not purchase Class II shares.
See "Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different sales charge,
bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges. There are no conversion features attached to
either class of shares.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase.
Purchase Price of Fund Shares
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Fund Shares."
Set forth below is a table of total front-end sales charges or underwriting
commissions and dealer concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a As a Dealer Concession
Size of Transaction Percentage of Percentage of Net As a Percentage
at Offering Price Offering Price Amount Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all front-end sales charges may at times
be allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that term
is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and (c)
the U.S. registered mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers - Class I. Distributors, or one of its
affiliates, may make payments, out of its own resources, of up to 1% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain trust companies and trust
departments of banks. See "Description of Special Net Asset Value Purchases,"
and the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
As indicated in the table below:
<TABLE>
<CAPTION>
Total Sales Charge
As a As a Dealer Concession
Size of Transaction Percentage of Net Percentage of Net As a Percentage
at Offering Price Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1.0% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of the Fund
- Contingent Deferred Sales Charge."
Class I and Class II. Distributors, or one of its affiliates, out of its own
resources, may also provide additional compensation to securities dealers in
connection with sales of shares of the Franklin Templeton Funds. Compensation
may include financial assistance to securities dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for a discount, an investment in any of the
Franklin Templeton Investments may be combined with those of the investor's
spouse, children under the age of 21 and grandchildren under the age of 21. The
value of Class II shares owned by the investor may also be included for this
purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in Class I shares
registered in the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the reserved shares will be
paid as directed by the investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional Information
Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Fund at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.50%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enables Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any investments made by such parties after
cessation of employment; (2) companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer; (3) accounts managed by the
Franklin Templeton Group; (4) registered securities dealers and their
affiliates, for their investment account only; and (5) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and procedures of the employing securities
dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
of the Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of the Fund within 365 days of the payment date of such distribution.
To exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has an investment objective similar
to that of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a taxable redemption
for federal income tax purposes. Because the amount withdrawn under the plan may
be more than the shareholder's actual yield or income, part of the payment may
be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of Class I shares and
Class II shares may be subject to a contingent deferred sales charge if the
shares are redeemed within 12 months (Class I shares) or 18 months (Class II
shares) of the calendar month following the original purchase date. The
shareholder should ordinarily not make additional investments of less than
$5,000 or three times the annual withdrawals under the plan during the time such
a plan is in effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semiannually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% (or applicable) contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000, only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within 12 months (Class I shares) or 18 months
(Class II shares) of the calendar month following the original purchase date, a
contingent deferred sales charge will be imposed. Before making an exchange,
investors should review the prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were originally purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and the
class of shares being purchased, unless the original investment on which no
sales charge was paid originated from a fund on which the investor paid or was
subject to a front-end or contingent deferred sales charge. Exchanges of Class I
shares of the Fund which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference in sales charges,
unless the shares were held in the Fund for at least six months prior to
executing the exchange.
When an investor requests the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities unless it is felt that attractive investment opportunities consistent
with the Fund's investment objective exist immediately. Subsequently, this money
will be withdrawn from such short-term tax-exempt municipal securities and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed for Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton Class
I money market fund. If a Class I account has shares subject to a contingent
deferred sales charge, Class I shares will be exchanged into the new account on
a "first-in, first-out" basis. See also "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the 18 month
contingent deferred sales charge, and Class II shares that are not, the shares
will be transferred proportionately into the new fund. Shares received from
reinvestment of dividends and capital gains are referred to as "free shares,"
shares which were originally subject to a contingent deferred sales charge but
to which the contingent deferred sales charge no longer applies are called
"matured shares," and shares still subject to the contingent deferred sales
charge are referred to as "CDSC liable shares." CDSC liable shares held for
different periods of time are considered different types of CDSC liable shares.
For instance, if a shareholder has $1,000 in free shares, $2,000 in matured
shares, and $3,000 in CDSC liable shares, and the shareholder exchanges $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares. Similarly, if CDSC liable shares
have been purchased at different periods, a proportionate amount will be taken
from shares held for each period. If, for example, a shareholder holds $1,000 in
shares bought 3 months ago, $1,000 bought 6 months ago, and $1,000 bought 9
months ago, and the shareholder exchanges $1,500 into the new fund, $500 from
each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. Class I shares may be exchanged for shares of any of the
money market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money market
funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
Timing Accounts
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) makes more than two exchanges out of the Fund per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated under "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated at the scheduled close of the New York Stock Exchange ("Exchange"),
generally 1:00 p.m. Pacific time each day that the Exchange is open for business
will receive the price calculated on the following business day. Shareholders
are requested to provide a telephone number(s) where they may be reached during
business hours, or in the evening if preferred. Investor Services' ability to
contact a shareholder promptly when necessary will speed the processing of the
redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered shareholders
exactly as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own protection, to send
the share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone. Information may also be obtained by
writing to the Fund or Investor Services at the address shown on the cover or by
calling 1-800/632-2301. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, and government entities which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund and the class, the account
number, the fact that the repurchase was ordered by a dealer and the dealer's
name. Details of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is processed upon receipt
of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers regarding Class I
investments of $1 million or more and any Class II investments redeemed within
the contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month following their purchase, a contingent deferred sales charge will
be assessed, unless one of the exceptions described below applies. The charge is
1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares) of the class; (ii) shares purchased with reinvested
dividends and capital gain distributions; (iii) other shares held longer than
the contingency period; and (iv) followed by any shares held less than the
contingency period, on a "first-in, first-out" basis. For tax purposes, a
contingent deferred sales charge is treated as either a reduction in redemption
proceeds or an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; redemptions through a Systematic
Withdrawal Plan set up for shares prior to February 1, 1995, and for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually);
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size; and redemptions following the death of the
shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including: (i) effect a change in address, (ii) change a dividend option, (iii)
transfer Fund shares in one account to another identically registered account in
the Fund, (iv) request the issuance of certificates (to be sent to the
shareholder's address of record only) and (v) exchange Fund shares as described
in this Prospectus by telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum sales charge of each class of shares of the Fund).
The net asset value per share for each class of the Fund is determined in the
following manner: The aggregate of all liabilities is deducted from the
aggregate gross value of all assets, and the difference is divided by the number
of shares of the respective class of the Fund outstanding at the time. For the
purpose of determining the aggregate net assets of each class of the Fund, cash
and receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most current bid and ask
prices. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market as determined by the Manager. Municipal securities
generally trade in the over-the-counter market rather than on a securities
exchange. Other securities for which market quotations are readily available are
valued at the current market price, which may be obtained from a pricing
service, based on a variety of factors, including recent trades, institutional
size trading in similar types of securities (considering yield, risk and
maturity) and/or developments related to specific issues. Securities and other
assets for which market prices are not readily available are valued at fair
value as determined following procedures approved by the Board. With the
approval of directors, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund except that Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. The net asset value of all
outstanding shares of each class of the Fund will be computed on a pro rata
basis for each outstanding share based on the proportionate participation in the
Fund represented by the value of shares of such classes. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Franklin Class I and Class II share codes for the Fund, which will be needed to
access system information are 116 and 216, respectively. The system's automated
operator will prompt the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of a class' performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result. Tax equivalent yield demonstrates the yield from a
taxable investment necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of each class' yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the class' yield.
Current yield and tax equivalent yield for each class which are calculated
according to a formula prescribed by the SEC (see the SAI) are not indicative of
the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate or taxable equivalent distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by a class
during the past 12 months by a current maximum offering price for that class of
shares. A taxable equivalent distribution rate demonstrates the taxable
distribution rate necessary to produce an after tax distribution rate equivalent
to the class' distribution rate (calculated as indicated above). Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum front-end sales charge on the purchase of that class of shares. When
there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. The investment
results of each class, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' yield, tax equivalent yield,
distribution rate, taxable equivalent distribution rate or total return may be
in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.
General Information
As of May 1, 1995, the full name of each class is as follows: Franklin Federal
Tax-Free Income Fund, Franklin Federal Tax-Free Income Fund Series, Franklin
Federal Tax-Free Income Fund - Class I, and Franklin Federal Tax-Free Income
Fund, Franklin Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free
Income Fund - Class II.
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household, as
well as to reduce Fund expenses, Investor Services, when legally permissible,
will attempt to identify related shareholders within a household, and send only
one copy of the report. Additional copies may be obtained, without charge, upon
request to the Fund at the telephone number or address set forth on the cover
page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Fund's authorized stock consists of 10,000,000,000 shares of capital stock,
no par value divided into two classes. Three billion (3,000,000,000) shares of
capital stock have been allocated to Class I and three billion (3,000,000,000)
shares of capital stock have been allocated to Class II. All shares have one
vote and, when issued, are fully paid and nonassesable. All shares have equal
voting, participation and liquidation rights, but have no subscription,
preemptive or conversion rights.
Shares of the Fund have cumulative voting rights which means that in all
elections of directors each shareholder has the right to cast a number of votes
equal to his or her number of shares of common stock multiplied by the number of
directors to be elected at such election, and each shareholder may cast the
whole number of votes for one candidate or distribute such votes among two or
more candidates.
The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Directors in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Fund. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of directors such
as that provided in Section 16(c) of the 1940 Act.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, this affects
all shareholders, regardless of which class of shares they hold and, therefore,
each share has the same voting rights.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Andrew Jennings, Sr. since 1990 and Thomas Kenny and
Sheila Amoroso since 1994.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings attended Villanova University in Philadelphia, has been in the
securities industry for over 33 years and is a member of several municipal
securities industry related committees and associations. Mr. Jennings was First
Vice President and Manager of the Municipal Institutional Bond Department at
Dean Witter Reynolds, Inc. from 1985 to 1990.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986 and has been responsible for making portfolio recommendations
and decisions for the Fund since August 1994. He received a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara and Master of Science degree in Finance from Golden Gate University. He
is a member of several municipal securities industry related committees and
associations.
Sheila Amoroso
Portfolio Manager of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions for
the Fund since August 1994. She joined Franklin in 1986. She holds a bachelor of
science degree from San Francisco State University and is a member of municipal
securities industry related committees and associations.
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION777 Mariners Island Blvd., P.O. Box 7777 SEPTEMBER 1,
1995 San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Federal Tax-Free Income Fund (the "Fund") is a diversified, open-end
management investment company which invests in municipal securities with the
objective of providing as high a level of interest income exempt from federal
income taxes as is consistent with prudent investing, while seeking preservation
of shareholders' capital. Investments in municipal securities will be within the
four highest ratings of either Moody's Investors Service ("Moody's"), Standard &
Poor's Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch") or in
unrated securities which, in the opinion of the Fund's investment manager, are
of comparable quality to such four highest ratings. Normally, except for
temporary defensive purposes, at least 80% of the Fund's assets will be invested
in municipal securities exempt from federal income taxes.
A Prospectus for the Fund dated September 1, 1995, as may be amended from time
to time, provides the basic information an investor should know before investing
in the Fund, and may be obtained without charge from the Fund or from its
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors") at
the address shown above.
As explained in the Prospectus, this Fund offers two classes of shares to its
investors: Franklin Federal Tax-Free Income Fund - Class I ("Class I") and
Franklin Federal Tax-Free Income Fund - Class II ("Class II"). This new
multiclass structure allows investors to consider, among other features, the
impact of front-end sales charges and distribution fees ("Rule 12b-1 fees") on
their investments in the Fund.
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide investors with additional
information regarding the activities and operations of the Fund and should be
read in conjunction with the Fund's Prospectus.
Contents Page
The Fund's Investment Objective
and Policies (See also the
Prospectus "Investment Objective
and Policies of the Fund")....................... 2
Officers and Directors............................ 5
Investment Advisory and Other Services
(See also the Prospectus
"Management of the Fund") ....................... 8
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions................... 10
Additional Information Regarding
Fund Shares (See also the
Prospectus "How to
Buy Shares of the Fund," "How to
Sell Shares of the Fund,"
"Valuation of Fund Shares")...................... 10
The Fund's Underwriter............................ 13
Additional Information Regarding Taxation
(See also the Prospectus "Taxation of
the Fund and Its Shareholders").................. 15
General Information............................... 17
Appendix.......................................... 21
Financial Statements.............................. 24
The Fund's Investment
Objective and Policies
As noted in the Prospectus, the investment objective of the Fund is to provide
as high a level of interest income to shareholders which is exempt from federal
income tax as is consistent with prudent investing, while seeking preservation
of shareholders' capital. (See "Investment Objective and Policies of the Fund"
in the Prospectus). The investment objective of the Fund is a fundamental policy
and may not be changed without the approval of a majority of the Fund's
outstanding shares.
Description of Municipal and Other Securities
The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of some of the various
municipal and other securities in which the Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They, also, are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways, roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise 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. 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, from which money may be
used to make principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of state assurance
(although without obligation) to make up deficiencies in the debt service
reserve fund.
Industrial Development Bonds which pay tax-exempt interest are, in most cases,
revenue bonds and are issued by or on behalf of public authorities to raise
money for the financing of various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such bonds is solely
dependent on the ability of the facilities user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payment.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate and a right of demand, which
may be unconditional, to receive payment of the unpaid principal balance plus
accrued interest upon a short notice period (generally up to 30 days) prior to
specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily up to monthly, and
are calculated to maintain the market value of the VRDN at approximately its par
value upon the adjustment date.
When-Issued Purchases. New issues of municipal securities are offered on a
when-issued basis; that is, payment for and delivery of the securities (the
"settlement date") normally takes place after the date that the offer is
accepted. The purchase price and the yield that will be received on the
securities are fixed at the time the buyer enters into the commitment. While the
Fund will always make commitments to purchase such securities with the intention
of actually acquiring the securities, it may nevertheless sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, they would earn no income; however, it
is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time the Fund makes the
commitment to purchase a municipal bond on a when-issued basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The Fund does not believe that its net asset value or income will
be adversely affected by the purchase of municipal bonds on a when-issued basis.
The Fund will establish a segregated account in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
A portion of original issue discount relating to any stripped municipal bonds
(including bonds issued to finance public purpose governmental functions) and
their interest coupons may be taxable under certain circumstances.
Zero Coupon Securities. The Fund's investment in zero coupon bonds may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments. Zero-coupon securities make no periodic interest
payments but instead are sold at a deep discount from their face value. The
buyer receives a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date.
Because zero-coupon securities bear no interest, and compound semi-annually at
the rate fixed at the time of issuance the value of such securities is generally
more volatile than other fixed-income securities. Since zero-coupon bondholders
do not receive interest payments, zeros fall more dramatically than bonds paying
interest on a current basis when interest rates rise. When interest rates fall,
zero-coupon securities rise more rapidly in value, because the bonds reflect a
fixed rate of return.
In order to generate cash to satisfy distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Convertible and Step Coupon Bonds. The Fund may invest a portion of its assets
in convertible and step coupon bonds. The convertible bonds which the Fund may
purchase are zero coupon securities until a predetermined date at which time
they convert to a specified coupon security. The coupon on step coupon bonds
changes periodically during the life of the security based upon predetermined
dates chosen at the time of issuance and/or the occurrence in the future, of a
specified event, such as a change in rating by a NRSRO.
Callable Bonds. There are municipal bonds which are issued with provisions which
prevent them from being called, typically for periods of 5 to 10 years. During
times of generally declining interest rates, if the call-protection on callable
bonds expires, there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of factors, including
certain portfolio management strategies used by the Fund's investment manager,
the Fund believes it has reduced the risk of adverse impact on net asset value
based on calls of callable bonds. The investment manager may dispose of such
bonds in the years prior to their call date, if the investment manager believes
such bonds are at their maximum premium potential. In pricing such bonds in the
Fund's portfolio, each callable bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on the Fund net asset value. In light of the Fund's pricing
policies and because the Fund follows certain amortization procedures required
by the Internal Revenue Service ("IRS"), the Fund is not expected to suffer any
material adverse impact related to the value at which the Fund has carried the
bonds in connection with calls of bonds purchased at a premium. Notwithstanding
such policies, however, the reinvestment of the proceeds of any called bond may
be in bonds which pay a higher or lower rate of return than the called bonds;
and as with any investment strategy, there is no guarantee that a call may not
have a more substantial impact than anticipated or that the Fund's objectives
will be achieved.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow-secured bonds will often
receive a triple-A rating from S&P, Moody's and Fitch.
U.S. Government Obligations which may be owned by the Fund are issued by the
U.S. Treasury and include bills, certificates of indebtedness, notes and bonds,
or are issued by agencies and instrumentalities of the U.S. government and
backed by the full faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Fund may also invest, to the extent such investments would be
consistent with the foregoing objective and policies.
Timing of Securities Transactions
The Fund may purchase or sell securities without regard to the length of time
the security has been held to take advantage of short-term differentials in bond
yields consistent with its objective of seeking interest income while conserving
capital. While short-term trading increases the portfolio turnover, the
execution costs for municipal bonds are substantially less than those for
equivalent dollar values of equity securities.
The Fund anticipates that its annual portfolio turnover rate generally will not
exceed 100% but this rate should not be construed as a limiting factor. The
Fund's portfolio turnover rates for the fiscal years ended April 30, 1994 and
1995 were approximately 25% and 20%, respectively.
Investment Restrictions and Policies
The Fund has adopted the following additional restrictions as fundamental
policies, which means that they may not be changed without the approval of a
majority of the Fund's shares. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a portion
of an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan. Although such loans are not presently intended, this prohibition will
not preclude the Fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower provided such security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the Fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment adviser, own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and directors together
own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, "puts," "calls," "straddles,"
"spreads" or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the Fund and, therefore, there are no option transactions available for the
Fund. In addition, pursuant to the regulations under the Corporate Securities
Laws of the State of California, the Fund would have to limit its writing of
call options to 25% of its net assets, unless it received an exemption from the
Commissioner of Corporations, should such option transactions become available.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except to the extent the
Fund invests its uninvested daily cash balances in shares of Franklin Tax-Exempt
Money Fund and other tax-exempt money market funds in the Franklin Group of
Funds provided i) its purchases and redemptions of such money market fund shares
may not be subject to any purchase or redemption fees, ii) its investments may
not be subject to duplication of management fees, nor to any charge related to
the expense of distributing the Fund's shares (as determined under Rule 12b-1,
as amended under the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of the Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
11. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.
In order to change any of the foregoing restrictions, or any other fundamental
policies listed in the Prospectus, approval must be obtained from the Fund's
shareholders. Such approval requires the affirmative vote of the lesser of (i)
67% or more of the Fund's voting securities present at a meeting if the holders
of more than 50% of the Fund's voting securities are represented at that meeting
or (ii) more than 50% of the Fund's outstanding voting securities.
In response to state requirements:
(1) the Fund will not invest in real estate limited partnerships or in interests
(other than publicly traded equity securities) in oil, gas, or other mineral
leases, exploration or development;
(2) the Fund may not invest in warrants (valued at the lower of cost or market)
in excess of 5.0% of the value of the Fund's net assets. No more than 2.0% of
the value of the Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American Stock
Exchanges. Warrants acquired by the Fund in units or attached to securities may
be deemed to be without value.
Officers and Directors
The Board of Directors has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940 (the "1940 Act"), are
indicated by an asterisk (*).
Frank H. Abbott, III (74) Director
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Director
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
* Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Director
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
* Charles B. Johnson (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Director
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
* Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues (62) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Andrew Jennings, Sr. (55) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President, Franklin Advisers, Inc.; employee of Franklin Resources, Inc.
and its subsidiaries in a portfolio management capacity since 1990; from 1985 to
1990, first vice president and manager of the municipal institutional bond
department at Dean Witter Reynolds, Inc.
Thomas J. Kenny (32) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
R. Martin Wiskemann (68) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 20 of the
investment companies in the Franklin Group of Funds.
Directors not affiliated with the investment manager ("nonaffiliated directors")
are currently paid fees of $950.00 per month plus $950.00 per meeting attended.
As indicated above, certain of the Fund's nonaffiliated directors also serve as
directors, trustees or managing general partners of other investment companies
in the Franklin Group of Funds, and the Templeton Group of Funds (the "Franklin
Templeton Group of Funds") from which they may receive fees for their services.
The following table indicates the total fees paid to nonaffiliated directors by
the Fund and by other funds in the Franklin Templeton Group of Funds
<TABLE>
<CAPTION>
Total Fees Total Fees Received from Number of Boards in the
Received the Franklin Templeton Franklin Templeton Group of
Name from Fund* Group of Funds** Funds on which Each Serves***
<S> <C> <C> <C>
Frank H. Abbott, III........................... $22,800 $176,870 31
Harris J. Ashton............................... $22,800 $319,925 56
S. Joseph Fortunato............................ $22,800 $336,065 58
David W. Garbellano............................ $22,800 $153,300 30
Frank W.T. LaHaye.............................. $21,800 $150,817 26
Gordon S. Macklin.............................. $22,800 $303,685 53
</TABLE>
*For the fiscal year ended April 30, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 112 U.S.
based mutual funds or series.
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. Certain officers or directors who are shareholders of Franklin
Resources, Inc. may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning director compensation and expenses, please see
the Fund's Annual Report to Shareholders.
As of June 5, 1995, the directors and officers, as a group, owned of record and
beneficially approximately 311 shares, or less than 1% of the total outstanding
shares of the Fund. Many of the Fund's directors also own shares in various of
the other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services. The Manager and other subsidiary companies of Resources currently
manage over $128 billion in assets worldwide for more than 3.8 million
shareholders. The preceding table indicates those officers and directors who are
also affiliated persons of Distributors and Advisers.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's extensive research
activities include, as appropriate, traveling to meet with issuers and to review
project sites. The Manager's activities are subject to the review and
supervision of the Fund's Board of Directors to whom the Manager renders
periodic reports of the Fund's investment activities. Under the terms of the
management agreement, the Manager provides office space and office furnishings,
facilities and equipment required for managing the business affairs of the Fund;
maintains all internal bookkeeping, clerical, secretarial and administrative
personnel and services; and provides certain telephone and other mechanical
services. The Manager is covered by fidelity insurance on its officers,
directors and employees for the protection of the Fund. See the Statement of
Operations in the financial statements included in the Fund's Annual Report to
Shareholders dated April 30, 1995.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the
first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2 of
1% per year) on net assets of the Fund in excess of $100 million up to $250
million; 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of the
Fund in excess of $250 million up to $10 billion; 11/300 of 1% (approximately
44/100 of 1% per year) of net assets of the Fund in excess of $10 billion up to
$12.5 billion; 7/200 of 1% (approximately 42/100 of 1% per year) of net assets
of the Fund in excess of $12.5 billion up to $15 billion; 1/30 of 1%
(approximately 40/100 of 1% per year) of net assets of the Fund in excess of $15
billion up to $17.5 billion; 19/600 of 1% (approximately 38/100 of 1% per year)
of net assets of the Fund in excess of $17.5 billion up to $20 billion; and
3/100 of 1% (approximately 36/100 of 1% per year) of net assets of the Fund in
excess of $20 billion. Each class will pay its share of the fee as determined by
the proportion of the Fund that it represents.
Management fees for the fiscal years ended April 30, 1993, 1994 and 1995 were
$26,619,057, $31,132,949, and $30,723,439 respectively.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 1.5% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements.
The management agreement is in effect until April 30, 1996. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's
directors who are not parties to the management agreement or interested persons
of any such party (other than as directors of the Fund), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Fund or by the Manager on 30 days' written
notice and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended April 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated April 30, 1995.
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made 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 purchasing 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 utilizing 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 price. As a general rule, the Fund
does not purchase bonds in underwritings where it is not given any 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 rendered by such
dealers in the execution of orders. It is not possible to place a dollar value
on the special executions or on the research services received by Advisers from
dealers effecting transactions in portfolio securities. The allocations of
transactions in order to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staff 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. Provided that the Fund's officers are satisfied that the best execution
is obtained, the sale of Fund shares may also be considered as 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 such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended April 30, 1995 the Fund paid no
brokerage commissions. As of April 30, 1995, the Fund did not own securities of
its regular broker-dealers.
Additional Information
Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the fund into which the Fund's shareholders are seeking to exchange
reserves the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
for shares will be effected at the close of business on the day the request for
exchange is received in proper form at the net asset value then effective.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares of the
Fund will be offered with the following schedule of sales charges:
Sales
Size of Purchase in U.S. dollars Charge
Up to $100,000................................. 3%
$100,000 to $1,000,000......................... 2%
Over $1,000,000................................ 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases -
Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the Fund -
Description of Special Net Asset Value Purchases," certain categories of
investors may purchase Class I shares of the Fund without a front-end sales
charge ("net asset value") or a contingent deferred sales charge. Distributors
or one of its affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such purchases, as
indicated below. Distributors may make these payments in the form of contingent
advance payments, which may be recovered from the securities dealer, or set off
against other payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following purchase.
Other conditions may apply. All terms and conditions may be imposed by an
agreement between Distributors, or its affiliates, and the securities dealer.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks Distributors, or one of its affiliates, out of its
own resources, may pay up to 1% of the amount invested.
Letter of Intent
An investor may qualify for a reduced sales charge on the purchase of Class I
shares of the Fund, as described in the Prospectus. At any time within 90 days
after the first investment which the investor wants to qualify for the reduced
sales charge, a signed Shareholder Application, with the Letter of Intent
section completed, may be filed with the Fund. After the Letter of Intent is
filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter of Intent. Sales
charge reductions based upon purchases in more than one of the Franklin
Templeton Funds will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's holdings in the
Franklin Templeton Funds, including Class II shares, acquired more than 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
in the sales charge. Any redemptions made by the shareholder during the 13-month
period will be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter of Intent have been completed. If
the Letter of Intent is not completed within the 13-month period, there will be
an upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. An investor who executes a
Letter of Intent prior to a change in the sales charge structure for the Fund
will be entitled to complete the Letter of Intent at the lower of (i) the new
sales charge structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name. If the total purchases, less redemptions, equal the amount
specified under the Letter of Intent, the reserved shares will be deposited to
an account in the name of the investor or delivered to the investor or the
investor's order. If the total purchases, less redemptions, exceed the amount
specified under the Letter of Intent and equal an amount which would qualify for
a further quantity discount, a retroactive price adjustment will be made by
Distributors and the securities dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter of Intent.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter of Intent, the investor will
remit to Distributors an amount equal to the difference in the dollar amount of
sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single time. The shareholder will receive a written notification from
Distributors requesting the remittance. Upon such remittance the reserved shares
held for the investor's account will be deposited to an account in the name of
the investor or delivered to the investor or to the investor's order. If within
20 days after written request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to the investor.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission ("SEC"). In the
case of requests for redemption in excess of such amounts, the directors reserve
the right to make payments in whole or in part in securities or other assets of
the Fund from which the shareholder is redeeming, in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind;
however, should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates the net asset value of
each class as of the scheduled close of the Exchange (generally 1:00 p.m.
Pacific time) each day that the Exchange is open for trading. As of the date of
this SAI, the Fund is informed that the Exchange observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times prior to the scheduled close
of the Exchange. The values of such securities used in computing the net asset
value of the Fund's shares are determined as of such times. Occasionally, events
affecting the values of such securities may occur between the time at which they
are determined and the scheduled close of the Exchange which will not be
reflected in the computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by the
Board of Directors.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month, and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semiannual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800 DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping for institutional investors of the Fund. The
cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions, which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for
recordkeeping, operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods provided that its continuance is
specifically approved at least annually by a vote of the Fund's Board of
Directors, or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's
directors who are not parties to the underwriting agreement or interested
persons of any such party (other than as directors of the Fund), cast in person
at a meeting called for that purpose. The underwriting agreement terminates
automatically in the event of its assignment and may be terminated by either
party on 90 days' written notice.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for the Class I shares were reinvested at
the offering price (which includes the sales charge) and Distributors allowed
50% of the entire commission to the securities dealer of record, if any, on an
account. Starting with any income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
In connection with the offering of the Class I shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1993, 1994, and 1995 were
$41,936,626, $37,920,217, and $18,753,666 respectively. After payments to
dealers, Distributors retained $2,265,550, $2,518,222, and $976,816 for the
respective periods. Distributors may be entitled to reimbursement under the
distribution plan relating to Class I shares as discussed in "Plans of
Distribution" below. Except as noted, Distributors received no other
compensation from the Fund with respect to the Class I shares for acting as
underwriter.
Plans of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I Plan" and
"Class II Plan," respectively, or "Plans") pursuant to Rule 12b-1 under the 1940
Act.
The Class I Plan
Pursuant to the Class I Plan, the Fund may pay up to a maximum of 0.10% per
annum of its average daily net assets for expenses incurred in the promotion and
distribution of Class I shares. In implementing the Class I Plan, the Board of
Directors determined that the annual fees payable thereunder will be equal to
the sum of: (i) the amount obtained by multiplying 0.10% by the average daily
net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994 ("New Assets"), and (ii) the amount obtained
by multiplying 0.05% by the average daily net assets represented by Class I
shares of the Fund that were acquired before May 1, 1994 ("Old Assets"). Such
fees will be paid to the current securities dealer of record on the
shareholder's account. In addition, until such time as the maximum payment of
0.10% is reached on a yearly basis, up to an additional 0.02% will be paid to
Distributors under the Class I Plan. The payments to be made to Distributors
will be used by Distributors to defray other marketing expenses that have been
incurred in accordance with the Class I Plan, such as advertising.
The fee relating to the Class I Plan is an expense of Class I as a whole, so
that all Class I shareholders, regardless of when they purchased their shares
will bear Rule 12b-1 expenses at the same rate. That rate initially will be at
least 0.07% (0.05% plus 0.02%) of Class I's average daily net assets and, as
Class I shares are sold on or after May 1, 1994, (the "Effective Date") will
increase over time. Thus, as the proportion of Class I shares purchased on or
after May 1, 1994 increases in relation to outstanding Class I shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan, the Class I
Plan permits the Fund's directors to allow the Fund to pay a full 0.10% on all
assets at any time. The approval of the Fund's Board of Directors would be
required to change the calculation of the payments to be made under the Class I
Plan.
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of Class I shares, including, but not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Class I shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
For the fiscal year ended April 30, 1995, the total amount paid by the Fund
pursuant to the Plan was $4,624,356, which was used for the following purposes:
Dollar Amount
Payments to Dealers..................... $3,875,890
Advertising............................. 309,160
Printing and Mailing
of Prospectuses to Other
Than Current Shareholders.............. 218,383
Payments to Underwriters................ 220,923
The Class II Plan
Under the Class II Plan, the Fund is permitted to pay to Distributors or others
annual distribution fees, payable quarterly, of up to 0.50% of Class II's
average daily net assets, in order to compensate Distributors or others for
providing distribution and related services and bearing certain expenses of the
Class. All expenses of distribution and marketing over that amount will be borne
by Distributors, or others who have incurred them, without reimbursement by the
Fund. In addition to this amount, under the Class II Plan, the Fund shall pay
0.15% per annum, payable quarterly, of the Class' average daily net assets as a
servicing fee. This fee will be used to pay dealers or others for, among other
things, assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
Class I and Class II Plans
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of each class of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not be
entitled to participate in the Plans to the extent that applicable federal law
prohibits certain banks from engaging in the distribution of mutual fund shares.
Such banking institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Class I Plan and the Class II Plan were approved by shareholders on April 8,
1994, and March 24, 1995, respectively, and by the directors of the Fund,
including those directors who are not interested persons, as defined in the 1940
Act. The Class II Plan became effective on May 1, 1995. The Plans are effective
through April 30, 1996, and are renewable annually by a vote of the Fund's Board
of Directors, including a majority vote of the directors who are non-interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plans, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such directors be done by
the non-interested directors. The Plans and any related agreement may be
terminated at any time, without any penalty, by vote of a majority of the
non-interested directors on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the Manager, or by
vote of a majority of the Fund's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to each Plan, the Plan and any related agreements may not be
amended to increase materially the amount to be spent for distribution expenses
without approval by a majority of such class of the Fund's outstanding shares,
and all material amendments to the Plans or any related agreements shall be
approved by a vote of the non-interested directors, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board of Directors at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Directors with such other
information as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plan should be
continued.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Directors reserve the
right not to maintain the qualification of the Fund as a regulated investment
company if they determine such course of action to be beneficial to the
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
tax-exempt interest dividends) to shareholders will be taxable to the extent of
the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but does not guarantee that its distributions
will be sufficient to avoid any or all federal excise taxes.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
April 30, 1995 qualified for this deduction and it is not anticipated that any
of the current year's dividends will so qualify.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid, and will promptly after the close of
each calendar year advise them of the tax status for federal income tax purposes
of such dividends and distributions, including the portion of the dividends on
an average basis which constitutes taxable income or a tax preference item under
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for a full calendar year may have designated as tax-exempt or as tax
preference income a percentage of income which is not equal to the actual amount
of tax-exempt or tax preference income earned during the period of their
investment in the Fund.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares may not be fully deductible for federal income tax
purposes.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Any loss incurred on sale or exchange of the Fund's shares, held for six months
or less, will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares and will be disallowed to
the extent of exempt-interest dividends paid with respect to such shares.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Group of Funds and the Templeton Group
and a sales charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the tax basis of the
shares sold will be added to the tax basis of the shares acquired in the
reinvestment. Shareholders should consult with their tax advisors concerning the
tax rules applicable to the redemption or exchange of fund shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the Fund from direct obligations of the
U.S. Government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. Government securities do not generally qualify
for tax-free treatment. While it is not the primary investment objective of this
Fund to invest in such obligations, the Fund is authorized to so invest for
temporary or defensive purposes. To the extent that such investments are made,
the Fund will provide shareholders with the percentage of any dividends paid
which may qualify for such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with respect to the
application of their state and local laws to these distributions and on the
application of other state and local laws on distributions and redemption
proceeds received from the Fund.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount and such market discount
exceeds a de minimis amount under the Code. For such obligations purchased after
April 30, 1993, a portion of the gain on sale or disposition (not to exceed the
accrued portion of market discount as of the time of sale or disposition) is
treated as ordinary income rather than capital gain. Any distribution by the
Fund of such ordinary income to its shareholders will be subject to regular
federal and state income taxes in the hands of Fund shareholders. In any fiscal
year, the Fund may elect not to distribute to its shareholders its taxable
ordinary income and to instead, pay federal income or excise taxes on this
income at the Fund level. The amount of such distributions, if any, is expected
to be small.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of the Fund.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
General Information
Performance
As noted in the Prospectus, each class may from time to time quote various
performance figures to illustrate its past performance. Each class also may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
class be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations used by a class are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the classes to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period, and the deduction
of all applicable charges and fees. If a change is made in the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge currently in effect.
The average annual compounded rates of return for the Class I shares of the Fund
for the one-, five- and ten-year periods ended on April 30, 1995 were 1.73%,
7.50% and 8.77% respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods.
As discussed in the Prospectus, each class may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as a class' average annual compounded rate, except that such
quotations will be based on such class' actual return for a specified period
rather than on its average return over one-, five- and ten-year periods. The
total rates of return for the Class I shares of the Fund for the one-, five- and
ten-year periods ended on April 30, 1995 were 1.73%, 43.59% and 131.70%,
respectively.
In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation is a one-time
fee (charged on all direct purchases) which will have its greatest impact during
the early stages of an investor's investment in the Fund. The actual performance
of an investment will be affected less by this charge the longer an investor
retains the investment in the Fund.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield for each class is determined by dividing the net investment income
per share earned by a class during a 30-day base period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
a class during the base period. The yield for the Class I shares for the 30-day
period ended April 30, 1995, the date of the financial statements incorporated
herein, was 5.41%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Tax Equivalent Yield
The Fund may also quote a tax equivalent yield which demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. Such yield is computed by dividing that
portion of the yield of the Fund (computed as indicated above) which is
tax-exempt by one minus the highest applicable federal income tax rate (and
adding the product to that portion of the yield of the Fund that is not
tax-exempt, if any). The tax equivalent yield for the Class I shares of the Fund
for the 30-day period ended on April 30, 1995 was 8.96%.
As of the date of this SAI, the federal income tax rate upon which the Fund's
tax equivalent yield quotation is based was 39.6%. From time to time, as any
changes to such rates become effective, tax equivalent yield quotations
advertised by the Fund will be updated to reflect such changes. The Fund expects
updates may be necessary as tax rates are changed by the federal government. The
advantage of tax-free investments, such as the Fund, will be enhanced by any tax
rate increases. Therefore, the details of specific tax increases may be used in
sales material for the Fund.
Current Distribution Rate
Yield and tax equivalent yield which are calculated according to a formula
prescribed by the SEC are not indicative of the amounts which were or will be
paid to a class' shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent distribution rate. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price. A taxable equivalent distribution rate demonstrates the taxable
distribution rate equivalent to the class' current distribution rate (calculated
as indicated above). The advertised taxable equivalent distribution rate will
reflect the most current federal tax rates available to the Fund. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gains, and is calculated over a different
period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market as represented by an
index considered representative of the municipal bond market. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market. Another measure of volatility or
risk is standard deviation. Standard deviation is used to measure variability of
net asset value or total return around an average over a specified period of
time. The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
Class I shares at net asset value, sales literature pertaining to such class may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering price.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds and classes belonging
to the Templeton Group of Funds. Resources is the parent company of the advisers
and underwriter of both the Franklin Group of Funds and Templeton Group of
Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund and class performance as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices, and
averages. Such comparisons may include, but are not limited to, the following
examples:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Smith Barney, Shearson Donoghue's Money Fund Report Industry averages for
7-day annualized and compounded yields of taxable, tax-free, and government
money funds.
d) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices - LBMBI
measures yield, price and total return for the municipal bond market.
e) Bond Buyer's 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer's 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
g) Financial publications: The Wall Street Journal and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
j) Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is published
weekly in the Los Angeles Times and the San Francisco Chronicle.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's or class' performance
to the return on certificates of deposit or other investments. Investors should
be aware, however, that an investment in the Fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment in
a certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
figures. In addition there can be no assurance that the Fund will continue this
performance as compared to such other averages.
Other Features and Benefits
Franklin is a leader in the tax-free mutual fund industry, currently offering 42
tax-free funds, including 33 funds free from both federal and state personal
income taxes, and managing more than $40.9 billion in municipal bond assets for
over half a million investors.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the United States government
and its agencies. The market price of such securities, however, may fluctuate.
This fluctuation will have a direct impact on the net asset value of an
investment in the Fund.
Currently, there are more mutual funds than there are stocks listed on the
Exchange. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectus, shares of the Fund are generally sold
through securities dealers or other financial institutions. Investment
representatives of such securities dealers or financial institutions are
experienced professionals who can offer advice on the type of investment
suitable to an investor's unique goals and needs, as well as the types of risks
associated with such investment.
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
costs and/or other long-term goals. The Franklin College Costs Planner may
assist an investor in determining how much money must be invested on a monthly
basis in order to have a projected amount available in the future to fund a
child's college education. (Projected college cost estimates are based upon
current costs published by the College Board.) The Franklin Retirement Planning
Guide leads an investor through the steps to start a retirement savings program.
Of course, an investment in the Fund cannot guarantee that such goals will be
met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group, one of the largest mutual
fund organizations in the United States, and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 47 years and now services
more than 2.47 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin Templeton Group has over $128 billion in
assets under management for more than 3.8 million shareholder accounts, in
addition jto foundations and endowments, employee benefit plans, and
individuals, and offers 114 U.S. based mutual funds.
The Fund may identify itself by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked 2 out of 1,000 investment advisory
firms surveyed by TMS Holdings, Inc. As of April 19, 1995, this ranking was
unchanged.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
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 Class I's outstanding shares.
As of June 5, 1995, the principal shareholder of Class II, beneficial or of
record, and the shareholder's address and amount of share ownership were as
follows:
Shares Percentage
Lenore Hayes TTEE
Charles & Carmella Ortisi
TR DTD 12/30/92
44799 Brockton
Sterling Heights, MI 48314 12,926.990 5.9%
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the IRS in response to a Notice of Levy.
Appendix -
Description of Municipal Securities Ratings
Municipal Bonds
Moody's
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. (-): 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 which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: Municipal bonds rated AAA are 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: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: 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 bonds: 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 bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have 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 bonds: Considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B bonds: Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
CCC bonds: Have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.
C bonds: Imminent default in payment of interest or principal.
DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
Municipal Notes
Moody's
Moody's ratings for state, municipal and other short-term obligations are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used will be
as follows:
MIG-1: Notes are of the best quality and enjoy 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 are not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below usually will be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A plus (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's Short-term and Commercial Paper
Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflects an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Financial Statements
The financial statements contained in the Annual Report to Shareholders of the
Fund dated April 30, 1995 are incorporated herein by reference.
