16 P
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN FEDERAL TAX-FREE INCOME FUND
DATED SEPTEMBER 1, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund effective February 1, 1995:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge. A contingent deferred sales charge of 1%, however, will
be imposed on certain redemptions within 12 months of the calendar month
following such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND:
a) Add the following language under "General":
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.
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 definitions under
"Description of Special Net Asset Value Purchases" as described under
"Purchases at Net Asset Value" and as set forth in the SAI.
b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<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, from 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 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 investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency period"). See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
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<PAGE>
The size of a transaction which determines the applicable sales charge on the
purchase of Fund 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. mutual funds in the Templeton Group of Funds except Templeton
American Trust, Inc., 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. References throughout the
Prospectus, for purposes of aggregating assets or describing the exchange
privilege, refer to the above descriptions.
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 definition under
"Description of Special Net Asset Value Purchases" and as set forth in the
SAI.
c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of a front-end
sales charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, trustees 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; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer; (3) registered
securities dealers and their affiliates, for their investment account only,
and (4) 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.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 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. 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, a new contingency period will begin. 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 120 days after the redemption. The 120 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.
2
<PAGE>
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent deferred
sales charge within 120 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."
Shares of the Fund 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 an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund 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 their own resources, to such securities dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.
Shares of the Fund 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.
4.EXCHANGE PRIVILEGE
Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
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 the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged
3
<PAGE>
into and held in a Franklin or Templeton money market fund. See also "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
5.HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on investments of
$1 million or more, a contingent deferred sales charge of 1% applies to
redemptions of those investments within the contingency period of 12 months
of the calendar month following such purchase. The charge is 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such shares, and is retained
by Distributors. In determining if a charge applies, shares not subject to a
contingent deferred sales charge are deemed to be redeemed first, in the
following order: (i) Shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and (iii) other
shares held longer than 12 months; and followed by any shares held less than
12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; redemptions
through a Systematic Withdrawal Plan set up 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); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being deducted
from the total dollar amount redeemed.
4
<PAGE>
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
PROSPECTUS September 1, 1994
[LOGO]
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 tax-exempt municipal securities. 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. 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 concerning the Fund, dated September 1,
1994, 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 listed
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.
1
<PAGE>
CONTENTS PAGE
Expense Table................................... 2
Financial Highlights............................ 4
About the Fund.................................. 4
Investment Objective
and Policies of the Fund....................... 4
Management of the Fund.......................... 9
Distributions to Shareholders................... 10
Taxation of the Fund
and Its Shareholders........................... 12
How to Buy Shares of the Fund................... 14
Other Programs and Privileges
Available to Fund Shareholders................. 19
Exchange Privilege.............................. 21
How to Sell Shares of the Fund.................. 23
Telephone Transactions.......................... 26
Valuation of Fund Shares........................ 27
How to Get Information
Regarding an Investment in the Fund............ 27
Performance..................................... 28
General Information............................. 29
Account Registrations........................... 30
Important Notice Regarding
Taxpayer IRS Certifications.................... 31
Portfolio Operations............................ 31
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 aggregate
operating expenses of the Fund for the fiscal year ended April 30, 1994,
restated to reflect Rule 12b-1 fees and the higher sales charge on purchases as
though both had been in effect at the beginning of the period.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................ 4.25%*
Maximum Sales Charge Imposed on Reinvested Dividends................ NONE**
Deferred Sales Charge.............................................. NONE
Redemption Fees.................................................... NONE
Exchange Fee (per transaction)..................................... $5.00+
</TABLE>
*New sales charge effective July 1, 1994.
**The sales charge on reinvested dividends was eliminated effective May 1, 1994.
+$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
2
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C>
Management Fees................................................ 0.46%
Maximum 12b-1 Fees............................................. 0.10%++
Other Expenses
Shareholder Servicing Costs.......................... 0.01%
Reports to Shareholders.............................. 0.02%
Other Expenses....................................... 0.03%
Total Other Expenses........................................... 0.06%
Total Fund Operating Expenses.................................. 0.62%+++
</TABLE>
++At a special meeting held on April 22, 1994, shareholders of the Fund
approved a plan of distribution (the "Plan") pursuant to Rule 12b-1 of the
Investment Company Act of 1940 (the "1940 Act") which will provide for payments
by the Fund for distribution of its shares, at a maximum annual rate of 0.10%
of average net assets, effective May 1, 1994. See "Management of the Fund -
Plan of Distribution". 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.
+++Total operating expenses for the fiscal year ended April 30, 1994 have been
restated to reflect the maximum reimbursement allowed pursuant to the plan
permitted by Rule 12b-1, as though the plan had been in effect for the entire
fiscal year. The Fund's actual total operating expenses equalled 0.52% for the
fiscal year ended April 30, 1994.
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 regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, 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. As noted in the table above,
the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$49 $62 $76 $117
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, INCLUDING
FEES SET BY CONTRACT, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are paid by the Fund and are borne by the shareholders as a
result of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%. No deduction was made for sales charges on
reinvested dividends in effect through April 30, 1994; the expenses would be
increased if they were reflected.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund for the ten fiscal years in the period ended April 30, 1994. The
information for each of the five fiscal years in the period ended April 30,
1994 has been audited by Coopers & Lybrand, independent auditors, whose audit
report appears in the financial statements in the Fund's Statement of
Additional Information. The remaining figures, which are also audited, are not
covered by the accountant's current report. A copy of the Statement of
Additional Information as well as the Annual Report, which contains further
information regarding performance, may be obtained without charge as noted on
the front cover of this Prospectus.
<TABLE>
<CAPTION>
Net Asset Net Realized Distributions
Value at Net & Unrealized Total From From Net Distributions
Year Beginning Investment Gains (Losses) Investment Investment From Related
Ended of Year Income on Securities Operations Income Capital Gains
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 $12.24 $0.77 $(0.415) $0.355 $(0.785) $ --
1993 11.68 0.80 0.576 1.376 (0.816) --
1992 11.40 0.82 0.302 1.122 (0.842) --
1991 11.08 0.83 0.342 1.172 (0.852) --
1990 11.33 0.84 (0.238) 0.602 (0.852) --
1989 10.97 0.85 0.422 1.272 (0.912) --
1988 11.16 0.86 (0.118) 0.742 (0.924) (0.008)
1987 11.64 0.92 (0.398) 0.522 (0.980) (0.022)
1986 10.44 1.08 1.126 2.206 (1.006) --
1985 10.02 1.09 0.330 1.420 (1.000) --
1984 10.00 0.58 (0.130) 0.450 (0.430) --
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Net Asset Net Assets Ratio of Investment
Value at End Expenses Income Portfolio
Year at End Total of Year to Average to Average Turnover
Ended of Year Return* (in 000's) Net Assets Net Assets Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 $11.81 2.58% $6,804,262 0.52% 6.27% 24.59%
1993 12.24 11.89 6,414,739 0.51 6.68 13.30
1992 11.68 9.90 5,184,214 0.51 7.07 14.94
1991 11.40 10.67 4,353,043 0.50 7.34 28.79
1990 11.08 5.10 3,865,264 0.50 7.39 17.83
1989 11.33 11.71 3,648,652 0.51 7.59 16.43
1988 10.97 6.72 2,839,701 0.52 7.83 19.31
1987 11.16 4.01 2,407,298 0.54 7.14 19.70
1986 11.64 21.76 644,134 0.64 7.72 75.51
1985 10.44 14.81 69,445 0.85 8.60 98.64
1984 10.02 2.35 3,960 0.70 5.70 24.00
</TABLE>
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the 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 only one class of capital
stock with no par value. Shares of the Fund may be purchased (minimum
investment of $100 initially and $25 thereafter) at the current public offering
price which is equal to the Fund's net asset value (see "Valuation of Fund
Shares") plus a sales charge based upon a variable percentage (ranging from
4.25% to less than 1.0% of the offering price) depending upon 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 through
investing the Fund's assets primarily in securities exempt from such taxes
under the Internal Revenue Code of 1986, as amended (the "Code"). The Fund will
seek to achieve its objective by investing in a diversified portfolio of
municipal securities that are obligations issued by or on be half of states,
territories and possessions of
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<PAGE>
the United States and the District of Columbia, and their political
subdivisions, agencies, authorities and instrumentalities, the interest on
which is exempt from federal income tax. The investment objective of the Fund
is a fundamental policy which may not be changed without shareholder approval.
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.
TYPES OF SECURITIES THE FUND MAY PURCHASE
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. The rating agencies consider that bonds rated in the
fourth highest category may have some speculative characteristics and that
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than in the
cases with higher grade 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 the ratings is contained in the Appendix to
the Statement of Additional Information.
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 and each political subdivision, agency and
instrumentality of each 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. However, in any case, if 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
5
<PAGE>
assets may be invested in industrial 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 tax-exempt municipal securities. Under normal
circumstances, the securities included in this 80% policy will also not be
subject to the federal alternative minimum tax. There may be certain occasions,
however, during which a portion of the Fund's assets may be invested in taxable
instruments.
The Fund may also invest in municipal lease obligations primarily
through Certificates of Participation ("COPs"). COPs, which are widely used by
state and local governments to finance state and local government needs,
function much like installment purchase agreements. For example, a COP may be
created when long-term lease revenue bonds are issued by a governmental
corporation to pay for the acquisition of property or facilities which are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the bonds issued to purchase the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" or "abatement"
clause. A nonappropriation clause provides that while the municipality will use
its best efforts to make lease payments, the municipality may terminate the
lease without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, being faced with
increasingly tight budgets, therefore, 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. In most cases, however, the private sector value of the property
will be 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. 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 quality comparable to the ratings required for the Fund's
investments, including an assessment of the likelihood that the leases will not
be cancelled; (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
6
<PAGE>
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, 1994, the
Fund held 1.9% of its assets in such instruments.
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.
SOME CHARACTERISTICS OF MUNICIPAL SECURITIES
Municipal securities include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and the
obtaining of funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, sports facilities, convention or trade show facilities,
transportation bonds, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply,
gas, electricity, or sewage or solid waste disposal.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
pledge of the municipality's faith, credit and taxing power for the payment of
principal and interest, and are considered the safest type of municipal bond.
Revenue bonds are payable only from the revenues derived from a particular
project or facility and are generally dependent solely on a specific revenue
source. Industrial development bonds are a specific type of revenue bond backed
by the credit and security of a private user. Assessment bonds, wherein a
specially created district or project area levies a tax (generally on its
taxable property) to pay for an improvement or project may be considered a
variant of either category. There are, of course, other variations in the
security of municipal bonds, both within a particular classification and
between classifications, depending on numerous factors. The Fund is not limited
with respect to which category of municipal security it may acquire.
The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices on predesignated dates. Certain of
these obligations may carry a demand feature that permits the Fund to tender
them back to the issuer at par value plus accrued interest, prior to maturity,
which amount may be more or less than the amount the Fund paid for them.
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 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
7
<PAGE>
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 objectives, 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, 1994, the Fund derived 12.50% of its income from bonds,
the interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
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.
INVESTMENT RISK CONSIDERATIONS
While an investment in any of the Funds is not without risk, certain policies
are followed in managing each Fund which may help to reduce such risk. There
are two categories of risks to which a 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 a Fund invests are
likely to decrease in times of rising interest rates. Conversely, when rates
fall, the value of a Fund's debt investments may rise. Price changes of debt
securities held by each Fund have a direct impact on the net asset value per
share of the Fund.
CALLABLE BONDS
Callable municipal bonds are 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. Normally, the
Fund will not hold called bonds until they are redeemed if that will result in
a lost premium. In most cases, the investment manager will attempt to time the
sale to recover what the investment manager considers to be the optimum amount
of premium obtainable considering market conditions and the time remaining
before redemption.
8
<PAGE>
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 Statement of Additional Information.
MANAGEMENT OF THE FUND
The Board of Directors has the primary responsibility for the overall
management of the Fund and for electing the officers of the Fund who are
responsible for administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources' outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager to 34 U.S. registered investment companies (112 separate
series) in the Franklin Group of Funds(R) with aggregate assets of over $74
billion, approximately $40 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 pril 30, 1994, management fees totalling 0.46% of
the average monthly net assets of the Fund were paid to Advisers.
It is not anticipated that the Fund ill 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. To the extent that the Fund does
participate in transactions involving brokerage commissions, it is the
Manager's responsibility to select brokers through whom such transactions will
be effected. The Manager tries 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 Statement of
Additional Information.
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, 1994, the expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totalled 0.52% of the
average monthly net assets of the Fund.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 28, 1994. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. bution of the Fund's
shares. Such expenses may include, but are not limited to, Such expenses may
included, but are not limited to, the printing of
9
<PAGE>
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 for such distribution expenses is 0.10% per annum of the average daily
net assets of the Fund, 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. The Plan also covers any payments to or by the Fund, Distributors, or
other parties on behalf of the Fund 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 Plan are included in the maximum operating
expenses which may be borne by the Fund.
In implementing the Plan, the Board has 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 shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("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 Plan. The
payments to be made to Distributors will be used by Distributors to defray
other marketing expenses, such as advertising, that have been incurred in
accordance with the Plan.
The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear 12b-1 expenses at the same rate. That rate
initially will be at least 0.07% (0.05% plus 0.02%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed 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 Plan, the 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 Plan.
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.
Distri-
10
<PAGE>
butions 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.
DISTRIBUTION DATE
Although subject to change by the Board of Directors, without prior notice to
or approval by shareholders, the Fund's current policy is to declare income
dividends monthly to 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 Fund's Board of Directors. 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, the 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 its shares equal to the amount of the distribution.
While a 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 requested otherwise in writing or on the Shareholder Application, 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 (that is, without sales charge) on the
dividend reinvestment date. 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 Statement of Additional Information 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
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a
11
<PAGE>
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 period will be sent to the address of record. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds(R) or the Templeton Group at net asset value.
Additional information regarding automated funds transfer may be obtained from
Franklin's Shareholder Services Department.
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.
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 Statement of Additional
Information.
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such and intends to continue to so
qualify. 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 has qualified and 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.
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. 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.
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,
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<PAGE>
will be treated, for tax purposes, as if 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. 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.
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, 1994 qualified for this deduction and it is not anticipated that any
of the current year's dividends will so qualify.
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.
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.
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.
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, obliga-
13
<PAGE>
tions of a given state or its political subdivisions may be exempt from income
taxes in that state. 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.
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 at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a 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). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, 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 sales charges or underwriting commissions and dealer
concessions.
<TABLE>
<CAPTION>
Total Sales Charge
---------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price 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 through $2,500,000 1.00% 1.01% 1.00%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25%
on the excess over $5,000,000. Sales charges on purchases of $1,000,000 or more
are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.
The size of a transaction which determines the applicable sales charge
on the purchase of Fund 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 many funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included
for these purposes are (a) the open-end investment companies in the Franklin
Group (except Franklin Valuemark Funds and Franklin Government Securities
Trust) (the "Franklin Group of Funds"), (b) other investment products in the
Franklin Group 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) (the products in subparagraphs (a) and (b) are referred
to as the "Franklin Group") and (c) the open-end U.S. registered investment
companies in the Templeton Group of Funds except Templeton American Trust,
Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund (the "Templeton Group").
Purchases pursuant to a Letter of Intent for more than $2,500,000 will be at a
1% sales charge until cumulative purchases reach $2,500,000 and at the
incremental sales charge on the excess over $2,500,000. Purchases pursuant to
the Rights of Accumulation will be at the applicable sales charge of 1% or more
until the additional purchase, plus the value of the account or the amount
previously invested, less redemptions, exceeds $2,500,000, in which event the
sales charge on the excess will be calculated as stated above. Sales charge
reductions based upon purchases in more than one of the funds in the Franklin
Group or Templeton Group (the "Franklin/Templeton Group") may be effective only
after notification to Distributors that the investment qualifies for a
discount.
Distributors or its affiliates, at their expense, may also provide
additional compensation to dealers in connection with sales of shares of the
Fund and other funds in the Franklin Group of Funds or the Templeton Group.
Compensation may include financial assistance to 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 Group of Funds or the Templeton Group and
other dealer-sponsored programs or events. In some instances, this compensation
may be made available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares. 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. 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.
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
QUANTITY DISCOUNTS IN SALES CHARGES
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 dealer should notify Distributors at the time of each purchase
of shares which quali-
15
<PAGE>
fies for the reduction. In determining whether a purchase qualifies for any of
the discounts, investments in any of the Franklin/Templeton Group may be
combined with those of the investor's spouse and children under the age of 21.
In addition, the aggregate investments of a trustee or other fiduciary account
(for an account under exclusive investment authority) may be considered in
determining whether a reduced sales charge is available, even though there may
be a number of beneficiaries of the account.
In addition, an investment in the Fund 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 Group 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 shares of the Fund 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. 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 made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group 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 of 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 as specified below, depending upon the amount
actually purchased (less redemptions) during the period. An investor who
executes a Letter of Intent prior to the change in the sales charge structure
for the Fund will be entitled to complete the Letter at the lower of (i) the
new sales charge structure; or (ii) the sales charge structure in effect at the
time the Letter was filed with the Fund.
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 shares of the
Fund, 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 the
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. If the total purchases,
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less redemptions, equal the amount specified under the Letter, 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 and is an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the 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. 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, 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. 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. By completing the Letter of Intent section
of the Shareholder Application, an investor 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 of Intent 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.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase 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 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 enable Distributors to realize
economies of scale in its costs of distributing shares. A qualified group must
have more than 10 members, must be available to arrange for group meetings
between representatives of the Fund or Distributors and the members, must
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
must 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
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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 to 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
Shares of the Fund may be purchased at net asset value (without 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 other company in the Franklin/Templeton Group 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. If an investment by
a trust company or bank trust department at net asset value is made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make payment, out of their own resources, to such
dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. 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 120 days after the redemption. The 120 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 in the Statement of Additional Information.
Shares of the Fund may also be purchased at net asset value by (1) officers,
directors and full-time employees of the Fund or any fund in the Franklin
Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) registered securities dealers and
their affiliates, for
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<PAGE>
their investment account only, and (3) 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. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.
Shares of the Fund may also be purchased at net asset value 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 dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment
in a registered management investment company which charges a contingent
deferred sales charge and which has investment objectives similar to those of
the Fund.
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.
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A certificate will be issued if requested in writing 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 Shareholder 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 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 fund in the Franklin Group of Funds or the Templeton Group, 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. Withdrawals 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 sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more
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<PAGE>
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. 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. 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 payments 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 Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund's shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of the Fund") 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. Investors should review the
prospectuses 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. These requirements or limitations may include, 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. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED
TO A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
(PLEASE NOTE THAT THIS IS A CHANGE FROM THE CURRENT PROCEDURE WHERE
SHAREHOLDERS WOULD NOTIFY THE FUND IF HE OR SHE WISHED TO USE THE PRIVILEGE.)
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in a shareholder's account. The Fund and
Investor Serv-
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ices 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. 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 by telephone or by other means of
electronic transmission 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 are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, 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 reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. 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 Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
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 municipal
securities, 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 municipal
securities and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
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The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
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) make
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) make more than two exchanges out of the Fund
per calendar quarter, or (iii) exchange shares equal in value to at least
$5 million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests
by any Timing Account, person, or group if, in the Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objectives 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 in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
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 shares based upon the net asset value per share 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 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (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.
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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.
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.
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Custodial (other than a retirement account) - 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 FILE A TELEPHONE TRANSACTION APPLICATION (THE "APPLICATION")
MAY REDEEM SHARES OF THE FUND BY TELEPHONE. THE APPLICATION MAY 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 a completed Application 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 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, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) which desire to execute redemptions in excess
of $50,000 must complete an Institutional Telephone Privileges Agreement which
is available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
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. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all
other documents set forth above. A shareholder's letter should reference the
Fund, 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 repur-
25
<PAGE>
chase. 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 Statement of
Additional Information contains more information on the redemption of shares.
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
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: (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) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file an Application 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 by 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. 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
26
<PAGE>
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 the Fund is determined as of 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 the Fund).
The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, accrued expenses and taxes and any
necessary reserves is deducted from the aggregate gross value of all assets,
and the difference is divided by the number of shares of the Fund outstanding
at the time. For the purpose of determining the aggregate net assets of the
Fund, cash and receivables are valued at their realizable amounts. Interest is
recorded as accrued. Portfolio securities for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. 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 of Directors.
All money market instruments with a maturity of more than 60 days are valued at
current market, as discussed above. All money market instruments with a
maturity of 60 days or less are valued at their amortized cost, which the Board
of Directors has determined in good faith constitutes fair value for purposes
of complying with the 1940 Act. This valuation method will continue to be used
until such time as the directors determine that it does not constitute fair
value for such purposes. With the approval of directors, the Fund may utilize a
pricing service, bank or securities dealer to perform any of the above
described functions.
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, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R)
by calling the automated Franklin TeleFACTS(R) system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 16 followed by the # sign, when requested to do so by the automated
operator. (The TeleFACTS system is also available for exchange transactions.
See "Exchange Privilege.")
27
<PAGE>
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 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's 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 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 reflects the income per
share earned by the Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent 30-day period by the
maximum public offering price 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 a fund's yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any)
of the fund's yield.
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC (see the Statement of Additional Information)
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 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 the Fund during the past 12 months by a current maximum offering
price. A taxable equivalent distribution rate demon-
28
<PAGE>
strates the taxable distribution rate necessary to produce an after tax
distribution rate equivalent to the Fund's 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 Fund income and will assume the payment of the
maximum sales charge on the purchase 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 the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures
should not be considered to represent what an investment may earn in the future
or what the Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements, and the auditor's report thereof, of the Fund and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus. Additional information on Fund performance will be
included in the Fund's Annual Report to Shareholders.
VOTING 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 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 routine annual shareholders' meetings. The
Fund may, however, hold a 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 or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has been in existence for at least 12 months and 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.
29
<PAGE>
More information is included in the Statement of Additional Information.
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.
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
30
<PAGE>
services which are available, or which are anticipated to be made available in
the near future, 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 broker
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 "await
ing TIN" certification to provide the Fund with a certified TIN within 60 days
after opening the account.
PORTFOLIO OPERATIONS
Following is a list of the persons primarily responsible for the day-to-day
portfolio management: Mr. Harrington since inception, Mr. Jennings since 1990
and Ms. Wong since 1986. Their business history for at least the last five
years and positions with the Manager are also provided:
Greg Harrington
Senior Vice President
Franklin Advisers, Inc.
Mr. Harrington is a graduate of Mount Saint Mary's College in Maryland and has
studied at the New York School of Finance. His experience in the municipal
securities industry dates back to 1946. He joined Advisers in 1983.
Andrew Jennings, Sr.
Vice President
Franklin Advisers, Inc.
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.
Stella Wong
Portfolio Manager
Franklin Advisers, Inc.
Ms. Wong holds a Bachelor of Science degree in Business Administration from
San Francisco State University and a Master's degree in Financial Planning
from Golden Gate University, and is a member of several industry related
committees and associations. She joined Advisers in 1985.
31
<PAGE>
FRANKLIN FUNDS AUTOMATIC INVESTMENT PLAN FRANKLIN GROUP OF FUNDS(R)
777 MARINERS ISLAND BLVD.
P.O. BOX 7777
SAN MATEO, CA 94403-7777
- --------------------------------------------------------------------------------
The Franklin Automatic Investment Plan gives you the convenience (FRANKLIN
of automatically investing in a Fund on a monthly basis. Shares LOGO)
are purchased at the applicable offering price, as indicated in
the Prospectus, next calculated after receipt of funds from your bank. There is
no additional charge for this service by the Fund or Franklin/Templeton Investor
Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund.
Franklin may correct any transfer error by a debit or credit to your bank
account and/or Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan to
begin.
CHANGING OR DISCONTINUING THE PLAN
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written
notice is received to initiate the Plan again. Franklin will need ten days
written or verbal notice to stop an Automatic Investment Plan prior to an
upcoming pay date. Ten days written notice is required if you are changing bank
information other the dollar amount. If a check or transfer is returned to
Franklin for any reason, including stop payment, insufficient funds or account
closed, your Automatic Investment Plan will be discontinued. Franklin may
also change or terminate service by written notice to you.
EXCHANGES
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone
if the Plan is to be transferred and credited to a fund other than that listed
on the original application.
RETIREMENT ACCOUNTS
When using the Automatic Investment Plan for Franklin Trust Company retirement
accounts, all purchases will be credited as a contribution for the year in
which they are received. Please be sure to monitor the amount of money credited
to your retirement account to avoid making an excess contribution.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AUTOMATIC INVESTMENT PLAN APPLICATION:
Name(s)_________________________________________________________ Please invest my Automatic investments for $______ per month in:
(Please print as shown on Franklin account registration.) Franklin Fund Name _____________________________________________
_________________________________________________________ Franklin Fund Account No. ______________________________________
Address ________________________________________________________
________________________________________________________ Preferred Monthly Date of Checking Account Debit:
Telephone ______________________________________________________ 1st bank business day on or after the 5th [ ] or 20th [ ]
Bank's Name ____________________________________________________
Branch Address _________________________________________________ Signature(s) ___________________________________ Date __________
Name(s) on Bank Account ________________________________________ ________________________________________________________________
Checking Account No. ___________________________________________ All registered owners must sign.
Please attach a voided check.
[Franklin Use Only: ABA No. ___________________________________]
If you have any questions, please call a Franklin Shareholder Services representative, toll free, at 1-800/632-2301.
</TABLE>
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN REVISION - Complete only if you are revising existing
Automatic Investment Plan: (and complete section above)
Bank Change ________________ Amount Change $______________ Other _______________
(Attach new (Indicate
voided check) new amount)
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
- --------------------------------------------------------------------------------
PLEASE RETURN THIS FORM TO:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
20.24/101 A (07/94)
32
<PAGE>
INSTRUCTIONS AND IMPORTANT NOTICE
SUBSTITUTE W-9 INSTRUCTION INFORMATION
GENERAL Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
OBTAINING A NUMBER If you do not have a Social Security Number Taxpayer
Indentification Number or you do not know your SSN TIN, you must obtain Form
SS-5 or Form SS-4 from your local Social Security or IRS office and apply for
one. If you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide
a certified TIN within 60 days.
WHAT SSN TIN TO GIVE Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Individual Individual *Trust, Estate, or Pension Plan Trust, Estate, or Pension Plan
Trust Trust
- ------------------------------------------------------------------------------------------------------------------------------------
*Joint Individual Owner who will be paying *Corporation, Partnership, or Corporation, Partnership, or
tax or first-named other organization other organization
individual
- ------------------------------------------------------------------------------------------------------------------------------------
*Unif. Gift/Transfer to Minor Minor *Broker nominee Broker nominee
- ------------------------------------------------------------------------------------------------------------------------------------
*Sole Proprietor Owner of business
- ------------------------------------------------------------------------------------------------------------------------------------
*Legal Guardian Ward, Minor, or Incompetent
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXEMPT RECIPIENTS Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
<TABLE>
<S> <C>
A corporation A real estate investment trust
A financial institution A common trust fund operated by a bank under section 584(a)
An organization exempt from tax under section 501(a), An exempt charitable remainder trust or a non-exempt trust
or an individual retirement plan described in section 4947(a)(1)
A registered dealer in securities or commodities registered An entity registered at all times under the Investment Company
in the U.S. or a U.S. possession Act of 1940
</TABLE>
IRS PENALTIES If you do not supply us with your SSN TIN, you will be subject
to an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty or
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement
resulting in no backup withholding on an account which should be subject to
backup withholding, you may be subject to an IRS $500 penalty and certain
criminal penalties including fines and imprisonment.
SUBSTITUTE W-8 INSTRUCTIONS INFORMATION
EXEMPT FOREIGN PERSON Check the "Exempt Foreign Person" box if you qualify as
a non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S.
(or your transactions are exempt from U.S. taxes under a tax treaty).
PERMANENT ADDRESS The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual,
provide your permanent address. If you are a partnership or corporation,
provide the address of your principal office. If you are an estate or trust,
provide the address of your permanent residence or the principal office of any
fiduciary.
NOTICE OF CHANGE IN STATUS If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and
backup withholding may also begin unless you certify to the Fund/Payer that (1)
the tax payer indentification number you have given is correct, and (2) the
Internal Revenue Service has not notified you that you are subject to backup
withholding because you failed to report certain interest or dividend income.
You may use Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer
active, you do not have to notify a Fund/Payer or broker of your change in
status unless you also have another account with the same Fund/Payer that is
still active. If you receive interest from more than one Fund/Payer or have
dealings with more than one broker or barter exchange, file a certificate with
each. If you have more than one account with the same Fund/Payer, the Fund/Payer
may require you to file a separate certificate for each account.
WHEN TO FILE File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
HOW OFTEN YOU MUST FILE This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certificate of foreign
status.
3/93
33
<PAGE>
THE FRANKLIN/TEMPLETON
TELEPHONE REDEMPTION AUTHORIZATION AGREEMENT
You may use Franklin/Templeton's telephone redemption privilege to redeem
uncertificated Franklin/Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin/Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Services"), transfer agent and
shareholder servicing agent for the Franklin/Templeton Funds.
SHAREHOLDER AUTHORIZATION: I/We request the telephone redemption privilege
under the terms described below and in the prospectus for each investment
company in the Franklin/Templeton Group of Funds (a "Franklin/Templeton Fund"
or a "Fund"), now open or opened at a later date, holding shares registered as
follows:
______________________________________________________________________________
Print name(s) as shown in registration (called "Shareholder")
______________________________________________________________________________
Account number(s)
______________________________________________________________________________
I/We authorize each Fund and Services to honor and act upon telephone requests,
given as provided in this agreement, to redeem shares from any Shareholder
account.
<TABLE>
<S> <C>
____________________________________________________ ______________________________________________________
Signature(s) of all registered owners and date
____________________________________________________ ______________________________________________________
Printed name (and title/capacity, if applicable)
</TABLE>
VERIFICATION PROCEDURES: I/We understand and agree that: (1) each Fund and
Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Services may be liable
for any losses due to unauthorized or fraudulent telephone instructions; (2)
the confirmation procedures will include the recording of telephone calls
requesting redemptions, 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
the sending of confirmation statements to the address of record each time a
redemption is initiated by telephone; and (3) as long as the Fund and Services
follow the confirmation procedures in acting on instructions communicated by
telephone which were reasonably believed to be genuine at the time of receipt,
neither they nor their parent or affiliates will be liable for any loss,
damages or expenses caused by an unauthorized or fraudulent redemption request.
JOINTLY OWNED/CO-TRUSTEE ACCOUNTS: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Services to honor telephone
redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
APPOINTMENT OF ATTORNEY-IN-FACT: In order to issue telephone redemption
requests acting alone, each of us individually makes the following appointment:
I hereby appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Services by registered mail, return receipt requested, or by a Fund or Services
upon receipt of any information that causes a Fund or Services to believe in
good faith that there is or that there may be a dispute among any of us with
respect to the Franklin/Templeton Fund account(s) covered by this agreement.
Each of us agrees to notify the Fund or Services immediately upon the death of
any of the undersigned.
CORPORATE/PARTNERSHIP/TRUST/RETIREMENT ACCOUNTS: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin/Templeton Fund and Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Services may honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
RESTRICTED ACCOUNTS: Telephone redemptions and dividend option changes may not
be accepted on Franklin Trust Company ("FTC") or Templeton Funds Trust Company
("TFTC") retirement accounts.
PLEASE RETURN THIS FORM TO:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
20.21/140 (06/94)
34
<PAGE>
THE FRANKLIN/TEMPLETON GROUP
To receive a free brochure and prospectus, which contain more complete
information, including charges and expenses on each of the funds listed below,
call Franklin Fund Information, toll free, at 1-800/DIAL BEN (1-800/342-5236)
or Templeton Sales Information at 1-800/292-9293. Please read this prospectus
carefully before you invest or send money.
<TABLE>
<S> <C> <C> <C>
TEMPLETON Colorado FRANKLIN FUNDS SEEKING FRANKLIN FUNDS FOR
GROUP OF FUNDS Connecticut GROWTH AND INCOME NON-U.S. INVESTORS
Florida*
Americas Government Georgia Balance Sheet Tax-Advantaged
Securities Fund Hawaii** Investment Fund High Yield Securities Fund
Indiana
Developing Markets Trust Kentucky Convertible Tax-Advantaged
Louisiana Securities Fund International Bond Fund
Foreign Fund Maryland
Massachusetts*** Equity Income Fund Tax-Advantaged
Global Infrastructure Fund Michigan*** U.S. Government
Minnesota*** Global Utilities Fund Securities Fund
Global Opportunities Trust Missouri
New Jersey Income Fund FRANKLIN/TEMPLETON
Global Rising New York* GLOBAL CURRENCY FUNDS
Dividends Fund North Carolina Premier Return Fund
Ohio*** Global Currency Fund
Growth Fund Oregon Rising Dividends Fund
Pennsylvania High Income
Income Fund Tennessee** Utilities Fund Currency Fund
Texas
Real Estate Securities Fund Virginia FRANKLIN FUNDS SEEKING Hard Currency Fund
Washington** HIGH CURRENT INCOME
Smaller Companies FRANKLIN MONEY
Growth Fund FRANKLIN FUNDS SEEKING AGE High Income Fund MARKET FUNDS
CAPITAL GROWTH
World Fund German Government Money Fund
California Growth Fund Bond Fund
FRANKLIN FUNDS SEEKING Federal Money Fund
TAX-FREE INCOME DynaTech Fund Global Government
Income Fund Tax-Exempt Money Fund
Federal Tax-Free Equity Fund
Income Fund Investment Grade California Tax-Exempt
Global Health Care Fund Income Fund Money Fund
Federal Intermediate-Term
Tax-Free Income Fund Gold Fund U.S. Government New York Tax-Exempt
Securities Fund Money Fund
High Yield Tax-Free Growth Fund
Income Fund FRANKLIN FUNDS SEEKING IFT U.S. Treasury Money
International Equity Fund HIGH CURRENT INCOME Market Portfolio
Insured Tax-Free AND STABILITY OF PRINCIPAL
Income Fund*** Japan Fund FRANKLIN FUND
Adjustable Rate FOR CORPORATIONS
Puerto Rico Tax-Free Pacific Growth Fund Securities Fund
Income Fund Corporate Qualified
Real Estate Securities Fund Adjustable U.S. Dividend Fund
FRANKLIN STATE-SPECIFIC Government
FUNDS SEEKING Small Cap Growth Fund Securities Fund FRANKLIN TAX-DEFERRED
TAX-FREE INCOME ANNUITY
Short-Intermediate
Alabama U.S. Government Valuemark
Arizona* Securities Fund
Arkansas**
California*
</TABLE>
* Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and a high yield
portfolio (CA).
** The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
*** Portfolio of insured municipal securities.
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND FRANKLIN
777 Mariners Island Blvd. FEDERAL
P.O. Box 7777 TAX-FREE
San Mateo, California 94403-7777 INCOME FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER PROSPECTUS
Franklin/Templeton Distributors, Inc. & APPLICATION
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777 SEPTEMBER 1, 1994
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
INDEPENDENT AUDITORS
Coopers & Lybrand
333 Market Street
San Francisco, California 94105
CUSTODIAN
Bank of America NT & SA
555 California Street, 4th Floor
San Francisco, California 94104
For an enlarged version of this prospectus
please call 1-800/DIAL BEN.
- ----------------------------------------------
Your Representative Is:
- ---------------------------------------------- [FRANKLIN LOGO]
[RECYCLED LOGO]
Printed on recycled paper 16 P 09/94
<PAGE>
16 SAI
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN FEDERAL TAX-FREE INCOME FUND
DATED SEPTEMBER 1, 1994,
AS AMENDED DECEMBER 22, 1994
1.The following substitutes the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":
ADDITIONAL INFORMATION REGARDING PURCHASES
Special Net Asset Value Purchases. 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 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. As a condition for these payments,
Distributors or its affiliates may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which
may be imposed by an agreement between Distributors, or its affiliates, and
the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and taxable income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% 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; and (ii) purchases of most taxable income Franklin
Templeton Funds made at net asset value by non-designated retirement plans:
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. These payment
breakpoints are reset every 12 months for purposes of additional purchases.
With respect to purchases made at net asset value by certain trust companies
and trust departments of banks and certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, 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 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.
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 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, other than by a designated
benefit plan, 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. The upward adjustment does not apply to designated benefit
plans. 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, 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 is 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. 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, the
investor will remit to
<PAGE>
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. 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.
2.The paragraph "Reinvestment Date" under "Additional Information Regarding
Purchases and Redemptions of Fund Shares" is substituted with the following
language:
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.
<PAGE>
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND [FRANKLIN LOGO]
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1994 777 MARINERS ISLAND BLVD., P.O. BOX 7777
AS AMENDED DECEMBER 22, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
<PAGE>
FRANKLIN [FRANKLIN LOGO]
FEDERAL TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1994 777 MARINERS ISLAND BLVD., P.O. BOX 7777
AS AMENDED DECEMBER 22, 1994 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.
A Prospectus for the Fund dated September 1, 1994, as may be amended from time
to time, which provides the basic information a prospective investor should
know before investing in the Fund, may be obtained without charge from the Fund
or the Fund's principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), by mail at the above address or by calling the number shown
above.
THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE A PROSPECTIVE INVESTOR WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND AND
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
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.................. 9
Additional Information Regarding
Purchases and Redemptions of
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........................... 12
Additional Information Regarding Taxation
(See also the Prospectus "Taxation of
the Fund and Its Shareholders")................. 13
General Information.............................. 14
Appendix......................................... 17
Financial Statements............................. 20
</TABLE>
1
<PAGE>
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).
MUNICIPAL SECURITIES
The Prospectus describes the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which the Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of
the issuer, secured by the taxing power for the payment of principal and
interest.
Revenue Anticipation Notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue Sharing
Program. They are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and 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 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. The Fund will purchase Industrial Development Bonds only to the
extent that the interest paid by a particular bond is tax-exempt pursuant to
the Tax Reform Act of 1986, which limited the types of facilities that may be
financed with tax-exempt industrial development and private activity bonds and
the amounts of such bonds each state may issue.
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.
2
<PAGE>
The interest rates are adjustable at intervals ranging from daily up to
monthly, calculated to maintain the market value of the VRDN at approximately
the par value of the VRDN upon the adjustment date. The adjustments are
typically based upon the prime rate of a bank or some other appropriate
interest rate adjustment index.
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 15 to 45 days after the date that
the offer is accepted. The purchase price and 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, it 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.
Municipal securities may also be sold in "stripped" form. Stripped Municipal
Securities represent separate ownership of interest and principal payments on
municipal obligations.
Callable Bonds. In the early 1980s large numbers of municipal bonds were issued
with provisions which prevented their being called, typically for periods of 5
to 10 years. During the coming years that protection will end on many issues.
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 the market
daily based on the bond's call date. Thus, the call of some or all of the
Fund's callable bonds may have an impact on its net asset value. In light of
the Fund's pricing policies and because the Fund follows certain amortization
procedures required by the Internal Revenue Service, the Fund is not expected
to suffer any material adverse impact related to the value at which the Fund
has carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the re-investment 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.
Certificates of Participation. As stated in the prospectus, the Fund may also
invest in municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that
the lease which is the subject of the transaction typically contains a
"nonappropriation" or "abatement" clause. A nonappropriation clause provides
that, while the municipality will use its best efforts to make lease payments,
the municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds.
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 has determined that COPs held in the Fund's portfolio constitute
liquid investments based on various factors reviewed by the investment manager
and monitored by the Board. Such factors include (a) the credit quality of such
securities and the extent to which they are rated; (b) the size of the
municipal securities market for the Fund, 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 mu-
3
<PAGE>
nicipal bonds of comparable credit rating or quality. There is no limit as to
the amount of assets which the Fund may invest in COPs.
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 and Moody's Investors Service
("Moody's").
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's portfolio turnover rates for the fiscal years ended April 30, 1993
and 1994 were approximately 13% and 25%, respectively.
INVESTMENT RESTRICTIONS AND POLICIES
Restrictions - 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 in interest 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
4
<PAGE>
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.
It is not the Fund's policy to 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.
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 the 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, are indicated by an
asterisk (*).
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Director President and Director, Abbott Corporation (an investment company);
1045 Sansome St. Director, Mother Lode Gold Mines Consolidated; and director, trustee
San Francisco, CA 94111 or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton Director President, Chief Executive Officer and Chairman of the Board, General
General Host Corporation Host Corporation (nursery and craft centers); Director, RBC Holdings,
Metro Center, 1 Station Place Inc. (a bank holding company) and Bar-S Foods; director of certain of
Stamford, CT 06904-2045 the investment companies in the Templeton Group of Funds; and director,
trustee or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
S. Joseph Fortunato Director Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County Director of General Host Corporation; director of certain
P.O. Box 1945 of the investment companies in the Templeton Group of Funds;
Morristown, NJ 07962-1945 companies in the Templeton Group of Funds; and director, trustee
or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
David W. Garbellano Director Private Investor; Assistant Secretary/Treasurer and Director, Berkeley
111 New Montgomery Street, #402 Science Corporation (a venture capital company); and director, trustee
San Francisco, CA 94105 or managing general partner, as the case may be, of most of the
investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
* Charles B. Johnson President and President and Director, Franklin Resources, Inc.; Chairman of the
777 Mariners Island Blvd. Director Board and Director, Franklin Advisers, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and General Host Corporation; director of certain of the
investment companies in the Templeton Group of Funds; 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 most
of the investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
* Rupert H. Johnson, Jr. Vice President Executive Vice President and Director, Franklin Resources, Inc. and
777 Mariners Island Blvd. and Director Franklin/Templeton Distributors, Inc.; President and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.;
director of certain of the investment companies in the Templeton Group
of Funds; 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 most of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Director General Partner, Peregrine Associates and Miller & LaHaye, which are
20833 Stevens Creek Blvd. General Partners of Peregrine Ventures and Peregrine Ventures II
Suite 102 (venture capital firms); Chairman of the Board and Director,
Cupertino, CA 95014 Quarterdeck Office Systems, Inc.; Director, FischerImaging Corporation;
and director or trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin Director Chairman, White River Corporation (information services); Director,
8212 Burning Tree Road Fundamerican Enterprises Holdings, Inc., Martin Marietta Corporation,
Bethesda, MD 20817 MCI Communications Corporation, Medimmune, Inc. (biotechnology) and
Infovest Corporation (information services); director of certain of
certain of the investment companies in the Templeton Group of Funds;
and director, trustee or managing general partner, as the case may be,
of most of the investment companies in the Franklin Group of Funds;
formerly, Chairman, Hambrecht and Quist Group; Director, H & Q
Healthcare Investors; and President, National Association of Securities
Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
* Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin Resources,
777 Mariners Island Blvd. and Director Inc.; Executive Vice President and Director, Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; director of
certain of the investment companies in the Templeton Group of Funds;
officer and/or director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of
all the investment companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources, Inc., Franklin Advisers,
777 Mariners Island Blvd. and Treasurer Inc. and Franklin/Templeton Distributors, Inc.; officer and/or
San Mateo, CA 94404 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 all the investment companies in the Franklin Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Kenny Vice President Senior Vice President, Franklin Advisers, Inc. and officer of some of
777 Mariners Island Blvd. the investment companies in the Franklin Group of Funds.
San Mateo, CA 94404
- ------------------------------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales Manager, Franklin/Templeton
777 Mariners Island Blvd. Distributors, Inc.; and officer of many of the investment companies
San Mateo, CA 94404 in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
R. Martin Wiskemann Vice President Senior Vice President, Portfolio Manager and Director, Franklin
777 Mariners Island Blvd. Advisers, Inc.; Senior Vice President, Franklin Management, Inc.; Vice
San Mateo, CA 94404 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 many of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices
Name and Address with the Fund Principal Occupations During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew Jennings, Sr. Vice President Vice President, Franklin Advisers, Inc.; employee of Franklin
777 Mariners Island Blvd. Resources, Inc. and its subsidiaries in a portfolio management
San Mateo, CA 94404 capacity since 1990; from 1985 to 1990, first vice president and
manager of the municipal institutional bond department at Dean Witter
Reynolds, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources, Inc. and
777 Mariners Island Blvd. and Secretary Franklin/Templeton Distributors, Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc.; and officer of all the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds. Directors not affiliated with the investment manager are currently paid
fees of $950.00 per month plus $950.00 per meeting attended and are reimbursed
for expenses incurred in connection with attending such meetings. During the
fiscal year ended April 30, 1994, fees and expenses totaling $156,474 were paid
to directors of the Fund who are not affiliated with the investment manager. No
officer or director received any other compensation directly from the Fund. As
of June 7, 1994, the directors and officers, as a group, owned of record and
beneficially less than 1% of the total outstanding shares of 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. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Fund, no other person holds
beneficially or of record more than 5% of the Fund's outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $112
billion in assets for over 3.5 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. The Manager, at its own
expense, furnishes the Fund with office space and office furnishings,
facilities and equipment required for managing the business affairs of the
Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager.
See the Statement of Operations in the financial statements at the end of this
SAI for additional details of these expenses.
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
8
<PAGE>
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.
Management fees for the fiscal years ended April 30, 1992, 1993 and 1994 were
$21,975,055, $26,619,057, and $31,132,949, 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 be 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 1/2% 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 1/2% 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, 1995. 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 Investment Company Act of 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, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. During the fiscal year ended April 30, 1994, their
auditing services consisted of rendering an opinion on the financial statements
of the Fund included in the Fund's Annual Report and this SAI.
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 include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
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 re-
9
<PAGE>
search and analysis activities and to receive the views and information of
individuals and research staff of other securities firms which the Manager or
its affiliates may lawfully and appropriately use in their investment advisory
capacities with other clients. Provided 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, the Fund paid no brokerage
commissions. As of April 30, 1994, the Fund did not own any securities of its
regular broker-dealers.
ADDITIONAL INFORMATION REGARDING PURCHASES AND REDEMPTIONS OF 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 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
reserve 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 of any of the investment companies 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.
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 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 their 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.
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, shares of the Fund will be
offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE IN U.S. DOLLARS CHARGE
- -------------------------------- ------
<S> <C>
Up to $100,000............................... 3%
$100,000 to $1,000,000....................... 2%
Over $1,000,000.............................. 1%
</TABLE>
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper form prior to
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 1:00 p.m. Pacific time 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 af-
10
<PAGE>
filiates), 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.
PURCHASES AT NET ASSET VALUE
As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with Distributors, Distributors or its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested, paid pro rata on a quarterly basis on average quarterly
balances for a period of one year.
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. 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 net asset value as of
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 corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior
to the 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
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
The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.
SPECIAL SERVICES
The Trust and Institutional Services Division of Distributors provides
specialized services, including
11
<PAGE>
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, 1995,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.
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.
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.
Until April 30, 1994, income dividends 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 will be
at net asset value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1992, 1993 and 1994 were
$34,937,882; $41,936,626; and $37,920,217; respectively. After allowances to
dealers, Distributors retained $1,928,345; $2,265,550; and $2,518,222; for the
respective periods. Distributors received no other compensation from the Fund
for acting as underwriter.
PLAN OF DISTRIBUTION
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby 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 its shares.
Pursuant to the 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 the Fund's 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
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.
In addition to the payments to which Distributors or others are entitled under
the Plan, the Plan also provides that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing
of any activity primarily intended to result in the sale 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 Plan.
In no event shall the aggregate asset-based sales charges which include
payments made under the Plan, plus any other payments deemed to be made
pursuant to the 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 Plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to 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 will not be entitled to participate in the Plan as a result of
12
<PAGE>
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. Such banking institutions, however, are
permitted to receive fees under the Plan 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 Plan has been approved by the directors of the Fund, including those
directors who are not interested persons, as defined in the 1940 Act. The Plan
is effective through April 30, 1995 and 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 Plan, 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 Plan and any related
agreement may be terminated at any time, without any penalty, by 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.
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 the Fund's outstanding shares, and all material amendments to the Plan 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 in 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 Plan
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.
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.
13
<PAGE>
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.
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.
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.
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It 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
the Fund be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by the Fund are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by the Fund 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 sales charge is deducted from the
initial $1,000 purchase order, and that income dividends and capital gains are
reinvested at net asset value on the reinvestment dates during the period. 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 on the sales charge structure, historical performance
information will be restated to reflect the maximum sales charge in effect
currently.
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. The average annual
compounded rates of return for the Fund for the indicated periods ended on the
date of the financial statements included herein was as follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR TEN-YEAR
PERIOD PERIOD PERIOD
-------- --------- ---------
<S> <C> <C>
-1.50% 7.34% 9.66%
</TABLE>
These figures were calculated according to the SEC formula:
P(1+T)n = 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, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in
the same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's 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 Fund for the indicated periods ended on the
14
<PAGE>
date of the financial statements included herein was as follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR TEN-YEAR
PERIOD PERIOD PERIOD
-------- --------- --------
<S> <C> <C>
-1.50% 42.52% 151.48%
</TABLE>
YIELD
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned 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 during the base period. The
yield for the Fund for the 30-day period ended on the date of the financial
statements included herein was as follows:
30-DAY PERIOD
-------------
5.45%
This figure was obtained using the SEC formula:
Yield = 2 [(a-b + 1)6 - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursement)
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 Fund for the 30-day
period ended on the date of the financial statements included herein was as
follows:
30-DAY PERIOD
-------------
9.02%
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 federal, state and
local 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
Current 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 the Fund's 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 the Fund during the past 12 months
by a current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to the Fund's 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 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 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
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a "Current Distribution Rate for Net Asset
15
<PAGE>
Value Investments." This rate is computed by adding the income dividends paid
by the Fund during the last 12 months and dividing that sum by a current net
asset value. Figures for yield, total return and other measures of performance
for Net Asset Value Investments may also be quoted. These will be derived as
described elsewhere in this SAI with the substitution of net asset value for
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 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 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 Buyers'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 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
16
<PAGE>
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
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost 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 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $117 billion in
assets under management for more than 3.7 million shareholder accounts and
offers 111 U.S. based mutual funds. The Fund may identify itself by its NASDAQ
or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$40 billion in municipal bond assets for over half a million investors.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was
also ranked number one. Franklin has been ranked number one in service quality
by Dalbar for five of the past six years.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit, research and public education organization. The report illustrates,
among other things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the federal, state and
local taxing authorities.
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 BOND RATINGS:
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
17
<PAGE>
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
18
<PAGE>
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 therefor 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.
19
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Franklin Federal Tax-Free Income Fund:
We have audited the accompanying statement of assets and liabilities of
Franklin Federal Tax-Free Income Fund (the Fund), including the statement of
investments in securities and net assets, as of April 30, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights, included under the caption "Financial Highlights," for
each of the periods indicated thereon. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
April 30, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Federal Tax-Free Income Fund as of April 30, 1994, the results of its
operation for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated thereon, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
San Francisco, California
June 3, 1994
20
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.0%
ALABAMA 1.0%
$ 5,400,000 Alabama Special Care Facilities Financing Authority, Montgomery Hospital Revenue,
Refunding, Baptist Hospital Gadsden, Inc. Project, Pre-Refunded, 10.25%, 11/01/15 ... $ 5,892,804
6,000,000 Alabama State Docks Department Coal Revenue, Refunding, Pre-Refunded, 10.00%,
10/01/05............................................................................. 6,598,380
7,000,000 Alabama Water Pollution Control Authority, Revolving Fund, Series B, 7.75%, 08/15/12 7,324,240
5,000,000 Birmingham GO, Street Improvement Warrants, Pre-Refunded, 8.00%, 07/01/13 ............. 5,641,200
1,000,000 Citronelle IDB, PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc.,
Series 1982, 8.00%, 12/01/12......................................................... 1,137,020
12,000,000 Courtland IDB, IDR, Refunding, Champion International Corp., Series A, 7.20%,
12/01/13............................................................................. 12,527,880
30,000,000 West Jefferson IDB, PCR, Refunding, Alabama Power Co., Miller Plant, Series C,
MBIA Insured, 6.05%, 05/01/23........................................................ 28,890,300
--------------
68,011,824
--------------
ALASKA .9%
1,775,000 Alaska Industrial Development and Export Authority, Revolving Fund, Series A, 7.95%,
04/01/10............................................................................. 1,930,969
Alaska State HFC,
1,225,000 CHM, Series A, 8.375%, 12/01/16 .................................................. 1,269,590
4,300,000 CHM, Series A-1, 6.75%, 12/01/32 ................................................. 4,312,126
3,975,000 CHM, Series A-3, 7.70%, 12/01/13 ................................................. 4,114,164
8,000,000 Housing, Series A, 6.60%, 12/01/23 ............................................... 8,133,280
2,155,000 Housing, Series B, 5.625%, 12/01/23 .............................................. 1,868,234
12,500,000 Insured Mortgage Program, 1st Series, 5.80%, 12/01/18 ............................ 11,375,875
8,825,000 Refunding, Mortage Insured, Program 1, Series 1990-B, 7.80%, 12/01/30 ............ 9,058,245
Anchorage Parking Authority Revenue, Refunding,
3,360,000 5th Avenue Garage Lease Project, 6.50%, 12/01/02 ................................. 3,443,967
3,500,000 5th Avenue Garage Lease Project, 6.75%, 12/01/08 ................................. 3,520,755
Valdez Marine Terminal Revenue, Refunding,
10,000,000 Pipeline, Inc. Project, 5.90%, 02/01/07 .......................................... 9,823,500
2,000,000 Pipeline, Inc. Project, 5.75%, 11/01/28 .......................................... 1,794,620
--------------
60,645,325
--------------
ARIZONA .7%
5,275,000 Coconino County PCR, Series A, 5.875%, 08/15/28 ....................................... 4,629,287
14,720,000 Glendale IDA, Hospital Revenue, Northwest Development, Inc. Project, 8.875%,
01/01/16............................................................................. 15,674,739
7,400,000 Navajo County PCR, Refunding, Arizona Public Service Co., Series A, 5.875%,
08/15/28............................................................................. 6,628,254
11,680,000 Pima County IDA, MFHR, Fountains La Cholla Project, FHA Mortgage Insured, 8.00%,
12/01/25............................................................................. 11,933,689
5,820,000 Tempe IDA, Residential Care Facilities Revenue, Volunteers of America Care Facilities,
9.00%, 06/01/18...................................................................... 6,140,682
--------------
45,006,651
--------------
ARKANSAS .2%
Arkansas State Development Finance Authority, SFMR, Mortgage Backed Securities
Program,
5,000,000 Series B, 5.65%, 06/01/16 ........................................................ 4,570,650
3,530,000 Series D, 5.65%, 06/01/16 ........................................................ 3,246,435
1,270,000 Arkansas State Development Finance Authority, Water Revenue, Refunding, Revolving
Loan Program, Series B, MBIA Insured, 5.25%, 12/01/10................................ 1,173,302
3,615,000 Desha County, Residential Housing Facilities Board, SFMR, Refunding, 7.50%,
04/01/11............................................................................. 3,845,600
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ARKANSAS (CONT.)
$ 3,115,000 Independence County, Public Health & Education Facilities Board Capital Revenue,
Improvement & Refunding, White River Control Project, 8.00%, 06/01/09............. $ 3,279,036
--------------
16,115,023
--------------
CALIFORNIA 1.3%
Alhambra COP,
410,000 Clubhouse Facility Project, 11.25%, 01/01/08 .................................. 437,105
455,000 Clubhouse Facility Project, 11.25%, 01/01/09 .................................. 484,685
500,000 Clubhouse Facility Project, 11.25%, 01/01/10 .................................. 532,620
5,325,000 Burbank RDA, Refunding, Tax Allocation, Series A, 6.25%, 12/01/24 .................. 4,924,080
2,030,000 California State Education Facilities Authority Revenue,
3,580,000 National University, Connie Lee Insured, 6.00%, 05/01/09 ...................... 3,514,128
2,225,000 Pooled College & University Financing, Refunding, Series B, 5.50%, 06/01/00.... 2,187,798
1,000,000 Pooled College & University Financing, Refunding, Series B, 5.70%, 06/01/01.... 983,990
4,000,000 California State Public Works Board Lease Revenue, Various University of California
Projects, Series A, 6.375%, 10/01/14.............................................. 3,943,600
1,020,000 Coalinga Public Finance Authority Revenue, Series B, 6.25%, 09/15/07 ............... 970,295
1,000,000 Commerce, Refuse to Energy Authority Revenue, Series 1984-A, 11.50%, 11/01/10....... 1,063,180
1,360,000 Corona-Norco USD, CFD No. 3, Pre-Refunded, 12.00%, 11/01/04 ........................ 1,458,124
4,000,000 Eden Township Hospital District Health Facilities Revenue, Refunding, COP, Eden
Hospital Health Services Corp., 5.75%, 07/01/12................................... 3,635,080
Forty-Niner Shops, Inc., Auxiliary Organization,
1,090,000 California State Long Beach Project, 6.875%, 04/01/07 ......................... 1,108,268
1,565,000 California State Long Beach Project, 6.875%, 04/01/12 ......................... 1,579,946
1,300,000 Los Angeles CRDA, Community Redevelopment Finance Authority Revenue, Grand
Center Qualified Redevelopment, Series A, 5.90%, 12/01/26......................... 1,110,057
6,400,000 Los Angeles Regional Airport Improvements Corp., Lease Revenue, Refunding, United
Airlines, 6.875%, 11/15/12........................................................ 6,169,856
870,000 Redlands COP, Refunding, Loma Linda University Medical Center, Series D, MBIA
Insured, 5.00%, 12/01/04.......................................................... 826,744
6,000,000 San Francisco City and County Redevelopment, MFR, Refunding, South Beach Project,
GNMA Insured, 5.70%, 03/01/29..................................................... 5,385,780
San Joaquin Hills Transportation,
18,795,000 Corridor Agency Toll Road Revenue, 7.00%, 01/01/30 ............................ 18,646,143
23,125,000 Corridor Agency Toll Road Revenue, 6.75%, 01/01/32 ............................ 22,328,344
Santa Barbara County Revenue, COP, Refunding,
2,500,000 Montecito Retirement, 5.75%, 04/01/13 ......................................... 2,279,725
3,150,000 Montecito Retirement, 5.80%, 04/01/18 ......................................... 2,841,836
--------------
88,216,419
--------------
COLORADO 3.8%
5,000,000 Arvada, City of, MFR Rental Housing, Arvada Manor Project, GNMA Mortgage Backed
Securities, 8.25%, 12/20/25....................................................... 5,118,450
9,000,000 Colorado Health Facilities Revenue Authority, Porter Memorial Hospital Project,
Series A, Pre-Refunded, 7.40%, 02/01/16........................................... 10,017,270
Colorado HFA, GO,
1,595,000 Series A, 7.50%, 05/01/29 ..................................................... 1,671,305
2,745,000 Series A, 8.375%, 01/01/30 .................................................... 2,852,220
Denver City & County, Airport System Revenue,
1,000,000 Series 1985, 8.375%, 08/01/96 ................................................. 1,005,770
2,000,000 Series 1985, 8.375%, 08/01/11 ................................................. 2,030,640
7,200,000 Series A, 7.50%, 11/15/12 ..................................................... 7,330,680
15,645,000 Series A, 8.875%, 11/15/12 .................................................... 17,186,502
79,945,000 Series A, 8.50%, 11/15/23 ..................................................... 85,423,631
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
COLORADO (CONT.)
Denver City & County, Airport System Revenue, (cont.)
$ 10,000,000 Series A, 7.25%, 11/15/25 ........................................................ $ 9,938,300
22,325,000 Series A, 8.00%, 11/15/25 ........................................................ 23,202,819
11,460,000 Series D, 7.00%, 11/15/25 ........................................................ 10,640,953
44,800,000 dDenver City & County, Special Facilities Airport Revenue, United Airlines Project,
Series A, 6.875%, 10/01/32......................................................... 41,493,312
4,000,000 Jefferson County, School District No. R-001, AMBAC Insured, 6.25%, 12/15/12 ........... 4,042,920
6,925,000 Littleton IDR, Porter Memorial Hospital Medical Office Project, Series 1982,
Pre-Refunded, 8.00%, 02/01/12........................................................ 7,630,242
16,500,000 Littleton MFR, Rental Housing, Riverpointe I Project, Series 1985, Mandatory Put
10/01/96, 8.00%, 12/01/22............................................................ 16,759,545
6,500,000 University of Colorado Hospital Authority Revenue, Series A, AMBAC Insured, 6.40%,
11/15/22............................................................................. 6,534,385
6,000,000 Westminster Sales & Use Tax Revenue, Series A, FGIC Insured, 6.25%, 12/01/12 .......... 6,047,100
--------------
258,926,044
--------------
CONNECTICUT
3,000,000 Connecticut State Housing Mortgage Finance Revenue, Series A-1, 5.85%, 11/15/16........ 2,797,740
--------------
DELAWARE
1,160,000 Delaware State EDA Revenue, Refunding, Water Development, Wilmington, Series B,
6.45%, 12/01/07...................................................................... 1,197,039
2,000,000 Delaware State Housing Authority, Refunding, MFMR, Series D, 6.75%, 07/01/06 .......... 2,002,220
--------------
3,199,259
--------------
DISTRICT OF COLUMBIA .6%
6,500,000 District of Columbia GO, Series A, Pre-Refunded, 8.00%, 06/01/07 ...................... 7,174,960
District of Columbia HFA, MFHR,
1,870,000 Refunding, FHA Insured, Series A, 7.10%, 09/01/12 ................................ 1,944,164
6,755,000 Refunding, FHA Insured, Series A, 7.15%, 03/01/24 ................................ 6,999,464
6,110,000 District of Columbia HFA, MFHR, FHA Mortgage Insured, Mayfair Mansions Apartments,
8.85%, 02/01/31...................................................................... 6,288,839
195,000 District of Columbia HFA, RMR, Series 1983-1, 11.375%, 07/01/08 ....................... 199,875
4,835,000 District of Columbia Hospital Revenue, Washington Hospital Center Corp., Series A,
9.00%, 01/01/08...................................................................... 5,900,827
5,685,000 District of Columbia Revenue, Association of American Medical Colleges, 7.50%,
02/15/20............................................................................. 6,231,555
5,265,000 District of Columbia Revenue, Catholic University of America, 6.45%, 10/01/23 ......... 5,302,592
--------------
40,042,276
--------------
FLORIDA 3.7%
Bay County Resource Recovery Revenue,
2,100,000 Refunding, Series A, MBIA Insured, 6.50%, 07/01/07 ............................... 2,213,043
11,020,000 Refunding, Series B, MBIA Insured, 6.50%, 07/01/07 ............................... 11,613,207
2,620,000 Series 1984, Pre-Refunded, 8.00%, 07/01/12 ....................................... 2,887,554
45,875,000 Broward County Resource Recovery Revenue, Broward Waste Energy Co., Limited
Partnership, North Project, Series 1984, 7.95%, 12/01/08............................. 50,241,382
3,800,000 Dunes Community Development District Revenue, Water and Sewer Project,
Pre-Refunded, 8.25%, 10/01/18........................................................ 4,346,744
5,285,000 Duval County HFA, MFHR, Magnolia Arms Apartments Project, Series A, 9.50%,
08/15/17............................................................................. 2,114,000
4,000,000 Escambia County HFA, Baptist Hospital, Inc., Series B, 6.00%, 10/01/14 ................ 3,580,560
Florida State Board of Education Capital Outlay, Refunding, Public Education,
22,475,000 Series 1992, 6.40%, 06/01/19 ..................................................... 23,063,845
6,000,000 Series A, 6.00%, 06/01/25 ........................................................ 5,779,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
LONG TERM INVESTMENTS (CONT.)
FLORIDA (CONT.)
Florida State Department of General Services, Division of Facilities Management
Revenue,
$16,000,000 Florida Facilities Pooled, Pre-Refunded, 7.75%, 09/01/16 ........................... $ 17,457,280
2,000,000 Florida Facilities Pooled, Pre-Refunded, 8.125%, 09/01/17 .......................... 2,282,280
7,125,000 Florida State Department of Transportation, Turnpike Revenue, Series A, Pre-Refunded,
7.75%, 07/01/09..................................................................... 8,115,161
20,500,000 Hillsborough County Capital Improvement Program, Water & Wastewater Facilities
Revenue, BMTF, Mode A, Sub-Series 2, Pre-Refunded, 8.30%, 08/01/16................ 22,243,525
4,245,000 Lakeland Retirement Community, 1st Mortgage Revenue, Carpenters Home Estate
Project, 9.50%, 09/01/06.......................................................... 4,159,803
6,500,000 Manatee County IDR, Manatee Hospital & Health Systems, Inc., 9.25%, 03/01/21 ....... 7,290,985
7,500,000 North Broward Hospital District, Hospital Revenue, Pre-Refunded, 8.00%, 01/01/14 ... 8,149,725
Orange County Health Facilities Authority Revenue,
4,835,000 Pooled Hospital Loan Program, Series B, BIG Insured, 7.875%, 12/01/25 ......... 5,219,720
6,005,000 Refunding, Pooled Hospital Loan Program, Series 1985-A, FGIC Insured, 7.875%,
12/01/25..................................................................... 6,482,818
16,000,000 St. Augustine Water & Sewer Utility Revenue, Refunding, 8.125%, 10/01/12 ........... 17,026,400
2,500,000 Santa Rosa County Health Facilities Authority Revenue, Refunding, Gulf Breeze
Hospital, Inc., Pre-Refunded, 8.70%, 10/01/14..................................... 2,892,925
Tampa Capital Improvement Program Revenue,
11,010,000 Series A, 8.25%, 10/01/18 ..................................................... 11,845,109
30,250,000 Series B, 8.375%, 10/01/18 .................................................... 32,507,860
------------
251,513,126
------------
GEORGIA 2.6%
Burke County Development Authority PCR, Georgia Power Co., Plant Vogle Project,
4,300,000 Series 1985-1, FGIC Insured, 10.125%, 06/01/15 ................................ 4,630,068
5,015,000 Series 1985-2, 10.60%, 10/01/15 ............................................... 5,517,954
1,345,000 Series 1985-3, 10.50%, 11/01/15 ............................................... 1,484,302
14,500,000 a,b,cDekalb County Residential Care Facilities for the Elderly Authority Revenue,
Refunding, Kings Bridge Retirement Center, Inc., 8.75%, 01/01/17.................. 4,350,000
Fulton County Development Authority Special Facilities Revenue,
3,400,000 Refunding, Delta Air Lines, Inc. Project, 6.85%, 11/01/07 ..................... 3,275,662
5,500,000 Refunding, Delta Air Lines, Inc. Project, 6.95%, 11/01/12 ..................... 5,258,055
Georgia Municipal Electric Authority Power Revenue,
19,200,000 Series A, Pre-Refunded, 7.875%, 01/01/18 ...................................... 20,640,000
14,000,000 Series B, 6.375%, 01/01/16 .................................................... 14,187,460
50,000,000 Series L, Pre-Refunded, 7.75%, 01/01/18 ....................................... 54,838,500
18,500,000 Georgia Municipal Electric Authority Special Obligation, Refunding, Second Crossover
Series, 8.125%, 01/01/17.......................................................... 20,616,585
5,505,000 Georgia State HFA, Revenue Homeownership Opportunity Program, Series C, 6.60%,
12/01/23.......................................................................... 5,521,240
Monroe County Development Authority, PCR, Georgia Power Co.,
16,000,000 Plant Scherer Project, 8.375%, 07/01/17 ....................................... 17,434,400
4,950,000 Plant Scherer Project, Series 1, 10.50%, 09/01/15 ............................. 5,405,598
10,000,000 Putnam County Development Authority, PCR, Refunding, Georgia Power Co., Plant
Branch Project, 8.375%, 07/01/17.................................................. 10,964,800
------------
174,124,624
------------
HAWAII 1.0%
Hawaii State Airports Systems Revenue,
12,000,000 2nd Series, 7.00%, 07/01/07 ................................................... 12,695,880
500,000 2nd Series, 6.90%, 07/01/12 ................................................... 527,660
2,830,000 2nd Series, 7.00%, 07/01/18 ................................................... 2,939,946
1,000,000 FGIC Insured, 7.00%, 07/01/20 ................................................. 1,056,550
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
HAWAII (CONT.)
Hawaii State Department of Budget & Finance, Special Purposes Mortgage Revenue,
$ 200,000 Hawaii Electric Light Co. Project, 7.20%, 12/01/14 ........................ $ 215,278
1,000,000 Hawaii Electric Light Co. Project, Series A, 7.35%, 01/01/20 .............. 1,055,430
900,000 Kaiser Hospital, 6.25%, 03/01/21 .......................................... 897,570
1,000,000 Wahiawa General Hospital Project, 7.50%, 07/01/12 ......................... 1,054,340
125,000 Hawaii State Department of Transportation Special Facilities Revenue, Refunding,
Matson Terminals, Inc., 5.75%, 03/01/13 ...................................... 115,400
4,900,000 Hawaii State GO, Series B-W, 6.375%, 03/01/11 .................................. 5,129,565
Hawaii State HFC, SFMR,
230,000 Series A, 7.00%, 07/01/11 ................................................. 232,240
3,350,000 Series A, 7.10%, 07/01/24 ................................................. 3,382,931
17,000,000 Series B, 5.700%, 07/01/13 ................................................ 15,908,600
360,000 Series B, 6.90%, 07/01/16 ................................................. 363,474
3,500,000 Series B, 5.85%, 07/01/17 ................................................. 3,276,805
11,880,000 Series B, 7.00%, 07/01/31 ................................................. 11,995,711
Honolulu City & County GO,
415,000 Series A, 6.30%, 03/01/08 ................................................. 430,011
1,000,000 Series A, 6.30%, 03/01/12 ................................................. 1,027,130
6,000,000 Series A, 5.75%, 04/01/12 ................................................. 5,849,160
300,000 Series A, Pre-Refunded, 6.70%, 08/01/11 ................................... 329,838
500,000 Series B, 5.50%, 10/01/11 ................................................. 474,225
Maui County Board Water Revenue,
500,000 Series A, FGIC Insured, Pre-Refunded, 6.65%, 12/01/09 ..................... 549,900
400,000 Series A, FGIC Insured, Pre-Refunded, 6.70%, 12/01/11 ..................... 441,160
-----------
69,948,804
-----------
IDAHO .1%
Idaho Housing Agency, SFMR,
1,800,000 Senior Bond, Series B-1, FGIC Insured, 7.850%, 07/01/09 ................... 1,852,110
2,850,000 Senior Bond, Series B-1, FGIC Insured, 7.90%, 01/01/21 .................... 2,940,345
-----------
4,792,455
-----------
ILLINOIS 5.2%
7,500,000 Aurora Hanover Park Naperville MFR, Series B, GNMA Insured, 6.75%, 05/15/24 .... 7,634,325
Bryant PCR, Refunding, Central Illinois Light Co. Project,
7,200,000 Series A, 6.50%, 02/01/18 ................................................. 7,328,880
5,000,000 Series C, 6.50%, 01/01/10 ................................................. 5,111,200
10,000,000 Chicago Central Public Library, Series B, AMBAC Insured, Pre-Refunded, 6.85%,
01/01/17 11,112,300
23,500,000 Chicago COP, AMBAC Insured, 7.75%, 07/15/11 .................................... 25,641,555
Chicago Metropolitan Housing Development Corp., Housing Development Mortgage
Revenue,
1,500,000 Refunding, Series B, MBIA Insured, 5.70%, 01/01/13 ........................ 1,408,170
2,240,000 Refunding, Series B, MBIA Insured, 5.80%, 01/01/25 ........................ 2,071,485
Chicago-O'Hare International Airport Revenue,
4,300,000 Special Facility United Airlines, Inc., 8.45%, 05/01/07 ................... 4,631,315
12,305,000 Special Facility United Airlines, Inc., 8.50%, 05/01/18 ................... 13,276,357
485,000 Special Facility United Airlines, Inc., Series A, 8.40%, 05/01/18 ......... 519,450
29,345,000 Special Facility United Airlines, Inc., Series C, 8.20%, 05/01/18 ......... 31,429,962
5,000,000 Chicago School Finance Authority GO, Refunding, Pre-Refunded, 7.75%, 06/01/09 .. 5,276,900
Illinois Development Finance Authority, PCR,
2,400,000 Commonwealth Edison Co. Project, Series 1985-A, 10.625%, 03/01/15 ......... 2,548,368
7,500,000 Commonwealth Edison Co. Project, Series 1991, 7.25%, 06/01/11 ............. 7,859,475
15,200,000 Refunding, Central Illinois Public Services Co., Series A, 6.375%, 01/01/28 15,236,328
25,960,000 Refunding, Illinois Power Co. Project, Series A, 7.375%, 07/01/21 ......... 27,833,533
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ILLINOIS (CONT.)
$ 3,000,000 Illinois Development Financial Authority, PCR, Refunding, Illinois Power Co. Project,
Series A, 1st Mortgage, MBIA Insured, 5.70%, 02/01/24 ............................... $ 2,696,370
6,000,000 Illinois Development Financial Authority Revenue, Refunding, Marriott Retirement,
Series A, 7.75%, 08/01/10 ........................................................... 6,322,140
6,000,000 Illinois Educational Facilities Authority Revenue, Shedd Aquarium Society,
Series 1987-A, 8.625%, 07/01/17 ..................................................... 6,618,000
Illinois HDA,
12,150,000 Housing Developing, Series A, 6.00%, 07/01/18 .................................... 11,483,937
1,000,000 MFH, Series A, 6.05%, 07/01/15 ................................................... 956,290
7,525,000 RMR, Series B, 7.25%, 08/01/17 ................................................... 7,742,924
Illinois HDA, MF, Program,
12,000,000 Series 1, 6.625%, 09/01/12 ....................................................... 12,021,360
7,550,000 Series 1, 6.75%, 09/01/21 ........................................................ 7,577,709
13,000,000 Series A, Refunding, 7.10%, 07/01/26 ............................................. 13,328,770
5,290,000 Series C, Pre-Refunded, 7.35%, 07/01/11 .......................................... 5,445,209
2,000,000 Illinois Health Facilities Authority Revenue, Edwards Hospital Project, 7.00%,
02/15/22 ............................................................................ 2,055,220
Illinois Health Facilities Authority Revenue, Refunding,
3,650,000 Galesburg Cottage Hospital, Pre-Refunded, 9.625%, 05/01/11 ....................... 4,205,567
9,345,000 Grant Hospital of Chicago, Series 1986, Pre-Refunded, 7.50%, 06/01/13 ............ 10,160,538
1,000,000 Servantcor, Series A, 7.875%, 08/15/19 ........................................... 1,058,970
3,000,000 Servantcor, Series B, 7.875%, 08/15/19 ........................................... 3,176,910
6,200,000 Westlake Community Hospital, 7.875%, 01/01/13 .................................... 6,551,044
7,000,000 Illinois Health Facilities Authority Revenue, Refunding, South Surburban Hospital,
7.00%, 02/15/18 ..................................................................... 7,147,840
2,600,000 Illinois State COP, Capital Guaranty, 6.875%, 07/01/07 ................................ 2,803,060
3,825,000 Lombard, Village of, Revenue, Refunding, Beacon Hill Project, 9.00%, 02/15/08 ......... 3,906,855
Metropolitan Pier & Exposition Authority Dedicated State Tax Revenue,
8,260,000 Expansion, Project A, 6.50%, 06/15/22 ............................................ 8,185,495
27,615,000 Expansion, Project A, 6.50%, 06/15/27 ............................................ 27,169,846
4,350,000 Onterie Center HFC, Mortgage Revenue, Refunding, Series 1989-A, MBIA Insured,
7.05%, 07/01/27 ..................................................................... 4,417,208
Southwestern Illinois Development Authority,
6,200,000 Anderson Hospital Project, Series A, 7.00%, 08/15/22 ............................. 6,006,560
3,030,000 Private Activity Revenue, Progressive Recovery Glenmark, 8.50%, 08/01/10 ......... 3,361,968
5,500,000 Solid Waste Disposal Revenue, LaCede Steel Co., 8.375%, 08/01/08 ................. 6,104,615
10,000,000 Solid Waste Disposal Revenue, LaCede Steel Co., 8.50%, 08/01/20 .................. 11,162,400
------------
350,586,408
INDIANA 1.9% ------------
Frankfort Middle School Building Corp.,
605,000 1st Mortgage Revenue, Pre-Refunded, 8.00%, 01/01/07 .............................. 658,530
660,000 1st Mortgage Revenue, Pre-Refunded, 8.10%, 01/01/08 .............................. 719,737
720,000 1st Mortgage Revenue, Pre-Refunded, 8.10%, 01/01/09 .............................. 785,167
785,000 1st Mortgage Revenue, Pre-Refunded, 8.10%, 01/01/10 .............................. 856,050
860,000 1st Mortgage Revenue, Pre-Refunded, 8.10%, 01/01/11 .............................. 937,839
935,000 1st Mortgage Revenue, Pre-Refunded, 8.10%, 01/01/12 .............................. 1,019,627
2,355,000 Hammond PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc.,
Series 1982, 8.00%, 11/01/12 ........................................................ 2,675,775
Indiana Bond Bank, Special Program,
6,000,000 Series 1986-A, 7.75%, 08/01/09 ................................................... 6,348,540
1,155,000 Series 1988-A, Pre-Refunded, 8.375%, 02/01/18 .................................... 1,280,618
2,535,000 Series 1994-A-1, 5.60%, 08/01/15 ................................................. 2,284,694
3,500,000 Indiana Health Facility Financing Authority, Hospital Revenue, Hancock Memorial
Hospital Project, Series 1990, 8.30%, 08/15/20 ...................................... 3,745,070
5,000,000 Indiana Highland School Building Corp. Mortgage, Pre-Refunded, 6.75%, 01/15/20 ........ 5,519,450
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
INDIANA (CONT.)
Indiana Municipal Power Agency, Power Supply Systems Revenue,
$10,000,000 Refunding, Series A, 5.75%, 01/01/18 ............................................ $ 9,155,500
5,000,000 Series A, MBIA Insured, 6.125%, 01/01/19 ........................................ 4,794,250
3,240,000 Indiana State Educational Facilities Authority Revenue, Manchester College Project,
6.85%, 10/01/18 .................................................................... 3,186,929
Indiana State Housing Financing Authority, SFMR,
3,805,000 Refunding, Series A, 6.75%, 01/01/10 ............................................ 3,813,105
16,570,000 Refunding, Series A, 6.80%, 01/01/17 ............................................ 16,606,454
Indianapolis Local Public Improvement,
6,000,000 Series A, 6.00%, 01/10/18 ....................................................... 5,829,660
12,075,000 Series D, 6.75%, 02/01/20 ....................................................... 12,294,644
Indianapolis Resource Recovery Revenue, Ogden Martin System, Inc.,
5,550,000 Series A, 7.90%, 12/01/08 ....................................................... 6,012,371
1,505,000 Series B, 7.90%, 12/01/08 ....................................................... 1,630,382
23,650,000 Lawrenceburg PCR, Refunding, Michigan Power Co. Project, Series E, 5.90%,
11/01/19 ........................................................................... 20,907,310
4,000,000 Merrillville, Multi School Building Corp., 1st Mortgage, Pre-Refunded, 7.50%, 07/15/09 4,562,360
10,750,000 Petersburg PCR, Refunding, Indianapolis Power & Light Co., Series A, 6.10%,
01/01/16 ........................................................................... 10,313,013
------------
125,937,075
------------
IOWA
2,500,000 Carroll Retirement Facility Revenue, Orchard View, Inc. Project, Pre-Refunded, 8.250%,
02/01/13 ........................................................................... 2,805,925
------------
KANSAS .4%
Merriam Hospital Revenue Improvement,
5,815,000 Shawnee Medical Center, Inc. Project A, 7.25%, 09/01/11 ......................... 6,041,378
15,215,000 Shawnee Medical Center, Inc. Project A, 7.25%, 09/01/21 ......................... 15,679,818
1,560,000 Shawnee Medical Center, Inc. Project B, 7.25%, 09/01/11 ......................... 1,613,087
3,580,000 Shawnee Medical Center, Inc. Project B, 7.25%, 09/01/21 ......................... 3,689,369
3,000,000 Olathe Hospital Revenue, Olathe Hospital Foundation, Inc. Project, Pre-Refunded,
10.25%, 08/01/16 ................................................................... 3,290,340
------------
30,313,992
------------
KENTUCKY 1.6%
3,900,000 Ashland PCR, Refunding, Ashland Oil, Inc. Project, 6.65%, 08/01/09 ................... 3,931,122
8,405,000 Christian County Hospital Revenue, Refunding, Jennie Stuart Medical Center Project,
7.625%, 04/01/10 ................................................................... 8,724,558
Kenton County Airport Board, Airport Revenue, Special Facilities,
20,000,000 Delta Air Lines, Inc., 7.80%, 12/01/15 .......................................... 20,513,600
10,000,000 Delta Air Lines, Inc., Project A, 7.50%, 02/01/20 ............................... 10,073,700
9,330,000 Delta Air Lines, Inc., Project A, 7.125%, 02/01/21 .............................. 8,989,455
3,350,000 Delta Air Lines, Inc., Project B, 7.25%, 02/01/22 ............................... 3,267,490
Kentucky Housing Corp., Housing Revenue,
2,185,000 Series A, 6.70%, 07/01/17 ....................................................... 2,182,444
4,910,000 Series B, 6.625%, 07/01/14 ...................................................... 4,902,930
700,000 Kentucky State Development Financial Authority, Hospital Revenue, Claire Medical
Center Project, Pre-Refunded, 7.125%, 09/01/21 ..................................... 781,613
4,500,000 Kentucky State Property & Buildings Commission Revenue, Project No. 48,
Pre-Refunded, 8.00%, 08/01/08 ...................................................... 5,095,035
20,375,000 Mount Sterling Lease Revenue, Kentucky League Cities, Series A, 6.10%, 03/01/08 ...... 19,654,744
19,910,000 dPendleton County, Multi-County Lease Revenue, Kentucky Association Counties
Leasing Trust, Series A, 6.50%, 03/01/19 ........................................... 19,428,974
------------
107,545,665
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
LOUISIANA 1.1%
$ 2,000,000 Bastrop PCR, Refunding, International Paper Co. Project, 6.90%, 03/01/07 ............... $ 2,095,580
Calcasieu Parish, Memorial Hospital Service District Revenue,
4,310,000 Lake Charles Parish Memorial Hospital Project, Series A, CGIC Insured, 6.375%,
12/01/12......................................................................... 4,335,429
5,530,000 Lake Charles Parish Memorial Hospital Project, Series A, CGIC Insured, 6.50%,
12/01/18......................................................................... 5,570,314
3,145,000 Lake Charles Parish Memorial Hospital Project, Series A, CGIC Insured, 6.65%,
12/01/21......................................................................... 3,194,848
Calcasieu Parish, Public Transportation Authority Mortgage Revenue,
5,695,000 Refunding, Series 1991-A, 7.75%, 06/01/12 ......................................... 5,893,471
830,000 Refunding, Series 1992-B, 6.375%, 11/01/02 ........................................ 836,789
915,000 Refunding, Series 1992-B, 6.875%, 11/01/12 ........................................ 927,966
East Baton Rouge Mortgage Financing Authority SFM,
4,550,000 Series C, 7.00%, 04/01/32 ......................................................... 4,582,442
6,355,000 Series D, 7.10%, 04/01/32 ......................................................... 6,500,275
3,091,535 Lafayette Public Trust Finance Authority SFMR, Refunding, Series 1990-A, 8.50%,
11/15/12 ............................................................................. 3,336,138
3,400,000 Louisiana Office Facility Corp., Capital Facility Bonds Statewide Lease, 7.75%,
12/01/10 ............................................................................. 3,685,770
3,500,000 Louisiana Public Facilities Authority Revenue, Refunding, Series B, Alton Ochsner
Medical Foundation Project, MBIA Insured, 6.50%, 05/15/22 ............................ 3,535,805
8,500,000 Louisiana Stadium & Exposition, District Hotel Occupancy Tax & Stadium Revenue,
Refunding, Series A, 6.00%, 07/01/24 ................................................. 8,257,155
Louisiana State GO,
8,050,000 dSeries A, AMBAC Insured, 6.10%, 05/01/10 ......................................... 8,063,444
3,530,000 dSeries A, AMBAC Insured, 6.10%, 05/01/11 ......................................... 3,518,845
4,000,000 Quachita Parish, Hospital Service District No. 1 Revenue, Glenwood Regional Medical
Center, 7.50%, 07/01/21 .............................................................. 4,210,200
2,750,000 St. Charles Parish Environmental Improvement Revenue, Power & Light Co. Project,
Series B, 5.95%, 12/01/23 ............................................................ 2,394,315
1,900,000 St. James' Parish, COP, 7.50%, 07/01/10 ................................................ 1,963,878
-------------
72,902,664
-------------
MAINE 1.2%
26,800,000 Financial Authority Solid Waste Recycling Facilities Revenue, Great Northern Paper Co.,
Bowater Project, 7.75%, 10/01/22 ..................................................... 28,459,456
Maine State Health and Higher Education Facilities Authority Revenue,
10,925,000 Refunding, Series D, FSA Insured, 5.70%, 07/01/13 ................................. 10,120,592
1,000,000 Refunding, Series D, FSA Insured, 6.00%, 07/01/24 ................................. 948,020
Maine State Housing Authority, Mortgage Purchase,
13,650,000 Series A, 5.65%, 11/15/20 ......................................................... 12,097,859
3,850,000 Series A-5, 6.20%, 11/15/16 ....................................................... 3,696,693
3,700,000 Series C, 6.55%, 11/15/12 ......................................................... 3,658,856
3,500,000 Series C, 6.65%, 11/15/24 ......................................................... 3,461,115
3,540,000 Series D, 6.45%, 11/15/07 ......................................................... 3,500,954
1,755,000 Series D-1, 8.30%, 11/15/22 ....................................................... 1,800,033
4,500,000 Skowhegan, PCR, Refunding, Scott Paper Co. Project, Series B, 8.10%, 10/01/15 .......... 4,971,420
10,000,000 Skowhegan, Solid Waste Disposal Revenue, S.D. Warren Co. Project, Series A, 8.40%,
10/01/15 ............................................................................. 11,119,600
-------------
83,834,598
-------------
MARYLAND 2.0%
43,225,000 Gaithersburg Hospital, Facilities Revenue Improvement, Shady Grove Hospital,
Series A, 8.25%, 09/01/21 ............................................................ 46,351,464
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MARYLAND 2.0%
Maryland State Community Development Administration, Department of Housing &
Community Development,
$ 5,910,000 MFHR, Insured Mortgage, Series G, 6.55%, 05/15/19 .............................. $ 5,902,613
1,000,000 SF, 7.25%, 04/01/27 ............................................................ 1,037,010
10,000,000 Series D, 6.05%, 05/15/24 ...................................................... 9,535,300
4,900,000 Maryland State Health and Higher Educational Facilities Authority Revenue, Hartford
Memorial Hospital and Fallston General Hospital, 8.50%, 07/01/14 .................. 5,254,711
6,500,000 Montgomery County, Housing Opportunity Community, SFMR, Refunding, Series B,
6.625%, 07/01/28 .................................................................. 6,494,865
1,500,000 Northeast Waste Disposal Authority, Hardford County Resource Recovery, Series A,
8.60%, 01/01/08 ................................................................... 1,572,585
Tokoma Park Hospital Facilities Revenue, Refunding,
31,055,000 Washington Adventist, Series A, 8.25%, 09/01/21 ................................ 33,620,143
23,210,000 Washington Adventist, Series A, Sub-Series 2, 8.25%, 09/01/21 .................. 25,127,146
------------
134,895,837
MASSACHUSETTS 4.9% ------------
10,900,000 Agawam Resource Recovery Revenue, Springfield Resource Recovery Project,
Series 1986, 8.50%, 12/01/08 ...................................................... 11,746,821
5,750,000 Boston Revenue, Refunding, City Hospital, Series B, 5.75%, 02/15/23 ................. 5,116,350
3,915,000 Lowell GO, Pre-Refunded, 7.625%, 02/15/10 ........................................... 4,533,766
2,310,000 Massachusetts Health & Education Facilities Authority Revenue, Notre Dame Health
Care Center, Series A, 7.875%, 10/01/22 ........................................... 2,527,140
Massachusetts State Bay Transportation Authority,
6,750,000 General Transportation System, Series A, Pre-Refunded, 7.625%, 03/01/15 ........ 7,717,275
12,500,000 General Transportation System, Series B, Pre-Refunded, 7.80%, 03/01/10 ......... 14,560,000
37,585,000 General Transportation System, Series B, Pre-Refunded, 7.875%, 03/01/21 ........ 43,939,120
Massachusetts State Consolidated Loan,
7,500,000 Series A, 7.50%, 06/01/04 ...................................................... 8,566,350
5,000,000 Series D, 7.00%, 07/01/07 ...................................................... 5,450,000
32,830,000 Massachusetts State Dedicated Income Tax, Fiscal Recovery Loan, Series A, 7.875%,
06/01/97 .......................................................................... 34,860,864
5,900,000 Massachusetts State GO, Refunding, Series B, 6.50%, 08/01/08 ........................ 6,242,908
5,250,000 Massachusetts State HFA, Housing Development, Series D, FGIC Insured, 6.875%,
11/15/21 .......................................................................... 5,436,218
Massachusetts State HFA, Housing Projects, Refunding,
25,635,000 Series A, 6.30%, 10/01/13 ...................................................... 25,044,626
11,400,000 Series A, 6.375%, 04/01/21 ..................................................... 11,064,156
Massachusetts State Health and Educational Facilities Authority Revenue,
9,020,000 Framingham Union Hospital, Series B, Pre-Refunded, 8.50%, 07/01/20 ............. 10,737,679
1,100,000 Melrose-Wakefield Hospital, Series B, Refunding, 6.35%, 07/01/06 ............... 1,100,693
4,680,000 St. Elizabeth's Hospital of Boston, Series B, FHA Mortgage Insured, FGIC Insured,
Pre-Refunded, 7.75%, 08/01/27 ................................................ 5,183,896
1,000,000 Sisters Providence Health System, Series A, 6.50%, 11/15/08 .................... 981,580
12,050,000 Sisters Providence Health System, Series A, 6.625%, 11/15/22 ................... 11,509,076
2,410,000 Massachusetts State HFAR, SFMR, Series G, 8.10%, 12/01/14 ........................... 2,545,201
Massachusetts State Housing Facilities Authority,
250,000 Series C, FGIC Insured, 6.875%, 11/15/11 ....................................... 260,748
9,715,000 Series C, FGIC Insured, 6.90%, 11/15/21 ........................................ 10,077,370
250,000 Series D, FGIC Insured, 6.80%, 11/15/12 ........................................ 259,368
6,000,000 Massachusetts State Industrial Finance Agency, 1st Mortgage Revenue, Brookhaven
at Lexington Retirement Project, Pre-Refunded, 10.25%, 01/01/18 ................... 7,164,720
Massachusetts State Water Resource Authority,
5,950,000 Series A, 6.00%, 04/01/20 ...................................................... 5,593,298
5,000,000 Series A, Pre-Refunded, 7.50%, 04/01/09 ........................................ 5,692,700
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MASSACHUSETTS (CONT.)
Massachusetts State Water Resource Authority, (cont.)
$13,095,000 Series A, Pre-Refunded, 7.625%, 04/01/14 .................................... $ 14,991,811
4,750,000 Series A, Pre-Refunded, 7.50%, 04/01/16 ..................................... 5,408,065
36,710,000 Series A, Pre-Refunded, 7.00%, 04/01/18 ..................................... 40,869,243
8,380,000 Series A, Pre-Refunded, 6.50%, 07/15/21 ..................................... 9,178,949
Plymouth County COP,
10,000,000 Series A, 7.00%, 04/01/12 ................................................... 10,442,100
5,000,000 Series A, 7.00%, 04/01/22 ................................................... 5,201,800
------------
334,003,891
------------
MICHIGAN 2.1%
2,445,000 dClimax-Scotts, Community Schools, 6.35%, 05/01/23 ................................ 2,441,748
4,960,000 Detroit GO, Unlimited Tax, Series A, 7.875%, 04/01/08 ............................ 5,284,483
10,075,000 Dexter Community Schools, Refunding, 5.70%, 05/01/14 ............................. 9,601,777
Greater Detroit Resource Recovery Authority Revenue,
13,205,000 Series A, 9.25%, 12/13/08 ................................................... 14,115,749
5,000,000 Series B, 9.25%, 12/13/08 ................................................... 5,344,850
22,250,000 Series C, 9.25%, 12/13/08 ................................................... 23,784,583
4,590,000 Series E, 9.25%, 12/13/08 ................................................... 4,906,572
1,055,000 Series G, 8.25%, 12/13/96 ................................................... 1,104,859
7,200,000 Series G, 9.25%, 12/13/08 ................................................... 7,696,584
5,980,000 Series H, 9.25%, 12/13/08 ................................................... 6,392,441
Lincoln Consolidated School District,
3,370,000 Refunding, FGIC Insured, 5.80%, 05/01/14 .................................... 3,190,885
7,055,000 Refunding, FGIC Insured, 5.85%, 05/01/18 .................................... 6,825,571
2,500,000 Michigan State HDA, Limited Obligation Revenue, Fraser Woods Project, FSA Insured,
6.625%, 09/15/19 ............................................................... 2,510,600
Michigan State HDA, Rental Housing Revenue,
5,000,000 Series A, Refunding, 6.60%, 04/01/12 ........................................ 5,044,450
10,000,000 Series B, Refunding, 5.70%, 04/01/12 ........................................ 9,330,100
3,055,000 Michigan State HFA, SFMR, Series A, 6.875%, 06/01/23 ............................. 3,106,904
Michigan State Hospital Finance Authority Revenue,
10,000,000 Sisters of Mercy Hospital, Series 1991, Pre-Refunded, 7.375%, 02/15/11 ...... 11,368,700
8,450,000 McLaren Obligated Group, Series A, Pre-Refunded, 7.50%, 09/15/21 ............ 9,768,876
9,420,000 Monroe County PCR, Detroit Edison Co. Project, Series 1985-A, 10.50%, 12/01/16 ... 10,450,454
------------
142,270,186
------------
MINNESOTA 3.1%
Bloomington Port Authority, Tax Increment Revenue,
795,000 Stadium Site Redevelopment Project, ETM 02/01/96, 8.00%, 02/01/96 ........... 845,681
1,020,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.25%, 02/01/97 ........... 1,105,007
1,255,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.25%, 02/01/98 ........... 1,359,592
1,515,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.25%, 02/01/99 ........... 1,641,260
1,800,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.25%, 02/01/00 ........... 1,950,012
2,115,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.25%, 02/01/01 ........... 2,291,264
41,800,000 Stadium Site Redevelopment Project, Pre-Refunded, 8.55%, 02/01/09 ........... 45,490,940
Dakota County Housing, RDA, Limited Annual Appropriation Tax & Revenue Supported,
485,000 Development Housing Facilities Project, 7.00%, 01/01/96 ..................... 490,417
515,000 Development Housing Facilities Project, 7.25%, 01/01/97 ..................... 524,584
555,000 Development Housing Facilities Project, 7.25%, 01/01/98 ..................... 566,111
600,000 Development Housing Facilities Project, 7.25%, 01/01/99 ..................... 611,250
645,000 Development Housing Facilities Project, 7.25%, 01/01/00 ..................... 656,236
695,000 Development Housing Facilities Project, 7.25%, 01/01/01 ..................... 705,126
3,930,000 Development Housing Facilities Project, 7.50%, 01/01/06 ..................... 3,986,710
2,705,000 Development Housing Facilities Project, 8.00%, 01/01/07 ..................... 2,807,303
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MINNESOTA (CONT.)
$ 7,715,000 Dakota County Housing, RDA, MFHR, Walnut Trails Project, 9.00%, 12/01/11 ........ $ 7,885,193
6,845,000 Duluth Commercial Development Revenue, Duluth Radisson Hotel Project, 10.75%,
12/01/14....................................................................... 7,241,873
5,970,000 Minneapolis CDA, Commercial Development Revenue, WNB & Co. Project, 8.50%,
12/01/15....................................................................... 5,974,119
Minneapolis CDA, Commercial Supported Development Revenue,
2,500,000 Limited Tax, Refunding, Series 1987-3, 8.625%, 12/01/27 .................... 2,656,300
1,000,000 Refunding, Series 1987-1, 8.625%, 12/01/12 ................................. 1,062,520
Minneapolis CDA & St. Paul Housing and RDA,
10,000 Homeownership Mortgage Revenue, Joint Housing Program, FGIC Insured,
9.875%, 12/01/15......................................................... 10,030
8,189,000 Homeownership Mortgage Revenue, Joint Housing Program, Phase II, FGIC
Insured, 7.875%, 07/01/17................................................ 8,480,856
Minnesota State HFA, SFM,
1,500,000 Series B, Refunding, 6.25%, 08/01/22 ...................................... 1,466,760
4,000,000 Series C, 5.60%, 01/01/17 ................................................. 3,664,200
3,865,000 Series D-1, 6.45%, 07/01/11 ............................................... 3,930,048
1,540,000 Series D-1, 6.50%, 01/01/17 ............................................... 1,567,058
2,300,000 Series F, 6.30%, 07/01/25 ................................................. 2,223,732
11,500,000 Minnetonka MFR, Rental Housing, Ridgepointe Housing Project, Phase II, Mandatory
Put 10/01/96, 8.00%, 05/15/22................................................ 11,347,855
1,500,000 Red Wing Housing, RDA, Jordan Tower II Project, 7.00%, 01/01/19 ............... 1,551,885
14,275,000 Roseville MFR, Rental Housing, Rosepointe No. 1 Project, Mandatory Put 10/01/96,
8.00%, 10/01/18.............................................................. 14,703,250
6,000,000 St. Louis Park EDA, Tax Increment Revenue, Refunding, FGIC Insured, Pre-Refunded,
8.40%, 09/01/09.............................................................. 7,225,920
St. Paul Port Authority,
4,315,000 Energy Park, Tax Increment Revenue, Refunding, Pre-Refunded, 8.00%,
12/01/07................................................................ 4,841,473
685,000 Housing & Redevelopment, MFR Rental Housing, Series B, 7.00%, 09/01/97 ... 665,258
980,000 Housing & Redevelopment, MFR Rental Housing, Series B, 7.25%, 09/01/01 ... 926,776
14,835,000 Housing & Redevelopment, MFR Rental Housing, Series B, 7.50%, 09/01/22 ... 13,252,254
385,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/96 ................. 378,286
415,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/97 ................. 402,903
445,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/98 ................. 428,878
480,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/99 ................. 459,485
515,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/00 ................. 489,904
550,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/01 ................. 520,163
595,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/02 ................. 559,705
640,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/03 ................. 599,046
685,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/04 ................. 638,221
740,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/05 ................. 686,542
795,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/06 ................. 734,675
855,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/07 ................. 787,267
915,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/08 ................. 839,696
670,000 IDR, Brown & Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ................. 612,963
2,445,000 IDR, Bandana Square, Series 1989-C, 7.70%, 12/01/07 ...................... 1,987,296
3,465,000 IDR, Bandana Square, Series 1989-C, 7.80%, 12/01/12 ...................... 2,690,746
2,010,000 IDR, Refunding, Common Bond Fund, 8.00%, 12/01/12 ........................ 1,593,528
2,000,000 IDR, Series 1990-C, 7.95%, 09/01/10 ...................................... 1,596,000
9,750,000 Southern Minnesota Municipal Power Agency, Power Supply System Revenue,
Series A, Pre-Refunded, 8.125%, 01/01/18..................................... 10,994,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MINNESOTA (CONT.)
Washington County Housing RDA,
$ 3,000,000 Housing Development Revenue, Orleans Apartments, Project A, 8.25%,
07/01/21 $ 2,997,180
5,210,000 Housing Development Revenue, Raymie Johnson Apartments, 7.70%, 12/01/19 ....... 5,258,557
10,000,000 Pooled Housing & Redevelopment, 7.20%, 01/01/22 ............................... 10,329,000
------------
211,293,287
------------
MISSISSIPPI .5%
13,500,000 Jackson County PCR, Refunding, Mississippi Power Co. Project, MBIA Insured, 5.65%
11/01/23 ......................................................................... 11,986,110
Medical Center Education Building Corp., University Revenue,
1,330,000 Medical Center Project, 5.65%, 12/01/09 ....................................... 1,227,590
1,000,000 Medical Center Project, 5.80%, 12/01/14 ....................................... 911,650
5,000,000 Medical Center Project, 5.90%, 12/01/23 ....................................... 4,493,600
4,865,000 Mississippi Business Financial Corp., Water PCR, Refunding, Mississippi Power Co.
Project, MBIA Insured, 5.65%, 11/01/23 ........................................... 4,284,946
6,500,000 Mississippi Higher Education, Student Loan Association, 6.05%, 09/01/07 ............ 6,218,875
3,235,000 Mississippi Home Corp., SFR, Refunding, Senior Series A, FGIC Insured, 9.250%,
03/01/12 ......................................................................... 3,398,917
------------
32,521,688
------------
MISSOURI 1.2%
10,000,000 Kansas City School District Building Corp., Leasehold Revenue, Capital Improvement
Project, Series A, FGIC Insured, Pre-Refunded, 7.90%, 02/01/08 ................... 11,233,400
1,810,000 Marion County Nursing Home District Revenue, Refunding, 9.00%, 08/01/03 ............ 1,904,554
Missouri State Health & Educational Facilities Authority Revenue,
5,000,000 Health Midwaste, Series B, MBIA Insured, 6.25%, 02/15/12 ...................... 5,035,700
3,750,000 Sisters of St. Mary's Health Care Project, BIG Insured, Pre-Refunded, 7.75%,
06/01/16 .................................................................... 4,208,775
Moberly IDA, Hospital Revenue,
5,090,000 Refunding, Moberly Regional Medical Center, Inc. Project, 8.625%, 03/01/02..... 5,485,798
10,460,000 Refunding, Moberly Regional Medical Center, Inc. Project, 8.75%, 03/01/16...... 11,205,589
5,310,000 Newton County IDA, Hospital Revenue, Refunding, Sale Hospital, Inc. Project,
Pre-Refunded, 9.00%, 01/01/05 .................................................... 5,938,279
10,200,000 St. Louis County Housing Authority Development Revenue, Northland Village
Apartments Project, 9.00%, 04/15/16 .............................................. 5,100,000
16,250,000 St. Louis County IDA, Health Facilities Revenue, Refunding & Improvement,
1st Mortgage, Normandy Osteopathic Hospitals Project, 9.125%, 08/01/13 ........... 17,224,513
5,425,000 St. Louis County, Regional Convention & Sports Complex Authority, Series B,
Pre-Refunded, 7.00%, 08/15/21 .................................................... 6,072,148
6,000,000 St. Louis Parking Facilities Revenue, 6.625%, 12/15/21 ............................. 6,010,740
3,600,000 West Plains, IDA Hospital Revenue, Ozarks Medical Center Project, Series A, 8.625%,
09/15/20 ......................................................................... 3,932,352
------------
83,351,848
------------
MONTANA .3%
4,000,000 Forsyth County, PCR, Puget Sound Power & Light Co. Project, MBIA Insured, 5.875%,
04/01/20 ......................................................................... 3,803,520
Forsyth PCR, Refunding, The Montana Power Co.,
5,000,000 Colstrip Project, Series A, 6.125%, 05/01/23 .................................. 4,762,850
8,300,000 Series B, 5.90%, 12/01/23 ..................................................... 7,659,074
2,835,000 Montana State Board Housing, Refunding, SF Program, Series A, 6.50%, 12/01/22 ...... 2,798,570
------------
19,024,014
------------
NEBRASKA .1%
6,850,000 Nebraska Investment Financial Authority, 7.00%, 11/01/09 ........................... 7,178,389
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
NEVADA 2.5%
$17,500,000 Clark County Airport System Improvement Revenue, 8.25%, 07/01/15 .............. $ 19,085,325
5,165,000 Clark County HFC, MFHR, FHA Insured, 7.75%, 07/01/23 .......................... 5,282,917
Clark County IDR,
12,500,000 Refunding, Nevada Power Co. Project, Series C, 7.20%, 10/01/22 ........... 12,811,125
17,080,000 Southwest Gas Corp., Series A, 7.30%, 09/01/27 ........................... 17,550,554
16,350,000 Southwest Gas Corp., Series A, 6.50%, 12/01/33 ........................... 15,257,656
30,000,000 Southwest Gas Corp., Series B, 7.50%, 09/01/32 ........................... 31,084,800
Nevada Housing Division, SF Program,
2,350,000 Refunding, Program A-1, 6.10%, 10/01/14 .................................. 2,249,514
3,900,000 Refunding, Program A-1, 6.25%, 10/01/26 .................................. 3,728,088
4,780,000 Issue 1988-A, FI/GML, 8.30%, 10/01/19 .................................... 4,950,120
4,340,000 Issue 1988 A-2, FI/GML, 8.375%, 10/01/19 ................................. 4,510,779
10,275,000 Nevada State Municipal Bond Bank, Project No. 40-41-A, ETM 02/01/10, 6.375%,
12/01/17..................................................................... 10,560,131
11,150,000 Reno Hospital Revenue, Refunding, St. Mary's Regional Medical Center, Series A,
MBIA Insured, 5.80%, 05/15/13................................................ 10,643,567
Reno RDA, Tax Allocation, Downtown Redevelopment Project,
785,000 Series A, Pre-Refunded, 10.65%, 09/01/01 ................................. 872,142
865,000 Series A, Pre-Refunded, 10.65%, 09/01/02 ................................. 961,023
950,000 Series A, Pre-Refunded, 10.65%, 09/01/03 ................................. 1,055,459
1,045,000 Series A, Pre-Refunded, 10.65%, 09/01/04 ................................. 1,161,006
1,150,000 Series A, Pre-Refunded, 10.65%, 09/01/05 ................................. 1,277,662
2,695,000 Series C, 7.75%, 09/01/05 ................................................ 2,867,534
8,290,000 Series D, 7.625%, 09/01/16 ............................................... 8,617,206
4,565,000 Washoe County Airport Authority, Airport System Improvement Revenue, Refunding,
Series B, MBIA Insured, 5.875%, 07/01/11..................................... 4,390,571
5,000,000 Washoe County Gas & Water Facilities Revenue, Refunding, Sierra Pacific, AMBAC
Insured, 6.30%, 12/01/14..................................................... 4,965,500
5,250,000 Washoe County Hospital Facility Revenue, Washoe Medical Center, Inc. Project,
Series A, 7.50%, 06/01/16.................................................... 5,483,205
------------
169,365,884
------------
NEW HAMPSHIRE 1.7%
New Hampshire Higher Education and Health Facilities Authority Revenue,
10,000,000 Kendal at Hanover Project, 8.00%, 10/01/19 ............................... 10,134,200
2,300,000 St. Joseph Hospital, 7.50%, 01/01/16 ..................................... 2,402,166
New Hampshire State HFA,
4,920,000 MFHR, Series 1, 7.10%, 01/01/14 .......................................... 5,076,161
4,890,000 SF Residential, Series A, 8.50%, 07/01/14 ................................ 5,178,265
5,000,000 SF Residential, Series B, 5.85%, 07/01/10 ................................ 4,758,900
New Hampshire State IDA,
12,480,000 PCR, New England Power Co., 7.80%, 04/01/16 .............................. 13,286,083
6,870,000 Pollution Control Public Service Co., Project A, 7.65%, 05/01/21 ......... 7,117,664
41,250,000 Pollution Control Public Service Co., Project B, 7.50%, 05/01/21 ......... 42,747,788
7,450,000 Pollution Control Public Service Co., Project C, 7.65%, 05/01/21 ......... 7,718,573
1,820,000 Resource Recovery Revenue, SES Concord Co. Project, 8.15%, 01/01/00 ...... 1,976,993
5,000,000 Resource Recovery Revenue, SES Concord Co. Project, 8.50%, 01/01/09 ...... 5,427,850
7,500,000 New Hampshire State Turnpike System Revenue, Refunding, 6.00%, 04/01/13 .. 7,293,150
------------
113,117,793
------------
NEW JERSEY .5%
9,655,000 Camden County Improvement Authority, Housing Development Revenue, Chestbury
Apartments Project, 8.75%, 12/15/16.......................................... 8,689,500
1,300,000 Middlesex County Industrial PCF Authority, PCR, Amerada-Hess Corp. Project,
Series 1984, 11.625%, 12/01/14............................................... 1,400,360
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
NEW JERSEY (CONT.)
$ 4,425,000 New Jersey EDA, 1st Mortgage Gross Revenue, Mega Care, Inc. Project, Pre-Refunded,
8.625%, 08/01/07................................................................. $ 5,012,065
3,700,000 New Jersey EDA, Natural Gas Facilities Revenue, New Jersey Natural Gas Co. Project,
8.50%, 06/01/18.................................................................. 3,894,435
New Jersey Health Care Facilities, Financing Authority Revenue,
4,000,000 Cathedral Health Service, 7.25%, 02/15/21 ....................................... 4,219,520
900,000 Community Memorial Hospital Association, Series C, 8.00%, 07/01/14 .............. 969,282
6,500,000 General Hospital Passaic, Series B, 10.375%, 07/01/14 ........................... 6,979,635
4,150,000 Zurbrugg Memorial Hospital Issue, Series C, 8.50%, 07/01/12 ..................... 4,357,127
------------
35,521,924
------------
NEW MEXICO 1.9%
5,000,000 Albuquerque Airport Revenue, Series A, Pre-Refunded, 9.25%, 07/01/19 .............. 5,718,900
Farmington PCR, Refunding,
4,000,000 Public Service Co. of New Mexico, Series A, AMBAC Insured, 6.375%, 12/15/22...... 4,025,680
20,000,000 Southern California Edison Co., Series A, MBIA Insured, 5.875%, 06/01/23 ........ 18,771,000
17,000,000 Lordsburg PCR, Refunding, Phelps Dodge Corp. Project, 6.50%, 04/01/13 ............. 17,170,340
38,705,000 Los Alamos County, Inc., Utility System Revenue, Refunding, Series 1986-A, 7.75%,
01/01/15......................................................................... 40,863,578
22,050,000 New Mexico State Mortgage Financial Authority, SFM, Refunding, Series A, 6.85%,
07/01/10......................................................................... 22,779,855
17,000,000 University of New Mexico, University Revenue, Series 1989, Pre-Refunded, 7.90%,
06/01/19......................................................................... 19,365,210
------------
128,694,563
------------
NEW YORK 12.5%
Battery Park City, Authority Revenue Bonds,
24,015,000 Refunding, Series A, 5.80%, 11/01/22 ......................................... 21,904,082
7,325,000 Series 1990, Pre-Refunded, 7.70%, 05/01/15 ................................... 8,285,381
Metropolitan Transportation Authority Revenue,
12,750,000 Service Contract Transportation Facilities, Series 4, Pre-Refunded, 7.875%,
07/01/17.................................................................... 14,774,063
3,000,000 Transit Facilities Obligation, Refunding, 7.00%, 07/01/09 .................... 3,089,400
18,210,000 Transportation Facilities, Refunding, Series M, 6.00%, 07/01/14 .............. 16,980,643
1,245,000 New Rochelle IDA, Civic Facilities Revenue, College of New Rochelle Project, 6.625%,
07/01/12......................................................................... 1,224,868
New York City GO,
6,900,000 Refunding, Series 1993-G, 5.50%, 08/01/05 .................................... 6,512,496
3,500,000 Refunding, Series 1993-G, 5.60%, 08/01/06 .................................... 3,307,010
2,300,000 Refunding, Series 1993-G, 5.70%, 08/01/08 .................................... 2,160,988
95,000 Series 1986-D, 8.50%, 08/01/16 ............................................... 103,114
1,180,000 Series 1986-D, Pre-Refunded, 8.50%, 11/01/12 ................................. 1,334,426
1,705,000 Series 1986-D, Pre-Refunded, 8.50%, 08/01/16 ................................. 1,879,984
3,355,000 Series 1987-A, Pre-Refunded, 8.50%, 11/01/13 ................................. 3,794,069
2,805,000 Series 1987-A, Pre-Refunded, 8.75%, 11/01/14 ................................. 3,194,362
1,355,000 Series 1987-D, Pre-Refunded, 8.50%, 08/01/09 ................................. 1,529,754
11,750,000 Series 1988-A, Pre-Refunded, 8.00%, 08/15/07 ................................. 12,793,165
7,870,000 Series 1988-A, Pre-Refunded, 8.00%, 08/15/08 ................................. 8,568,699
5,500,000 Series 1988-A, Pre-Refunded, 8.00%, 08/15/09 ................................. 5,988,290
6,500,000 Series 1988-A, Pre-Refunded, 8.00%, 08/15/10 ................................. 7,077,070
6,500,000 Series 1989-A, Pre-Refunded, 8.00%, 08/15/11 ................................. 7,077,070
2,610,000 Series 1989-E, 6.50%, 12/01/12 ............................................... 2,615,846
2,615,000 Series 1990-B, 8.00%, 06/01/01 ............................................... 2,904,611
7,000,000 Series 1990-B, 7.50%, 10/01/11 ............................................... 7,570,990
10,985,000 Series 1990-B, 7.50%, 10/01/12 ............................................... 11,881,047
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
NEW YORK (CONT.)
New York City GO, (cont.)
$ 385,000 Series 1990-B, ETM 06/01/01, 8.00%, 06/01/01 ............................. $ 448,564
1,000,000 Series 1991-A, 8.00%, 03/15/12 ........................................... 1,115,930
1,530,000 Series 1991-A, 8.00%, 03/15/13 ........................................... 1,707,373
10,000,000 Series 1991-A, 7.75%, 08/15/13 ........................................... 11,084,400
7,000,000 Series 1991-A, 7.75%, 08/15/14 ........................................... 7,759,080
3,285,000 Series 1991-A, 7.75%, 08/15/17 ........................................... 3,651,475
5,000 Series 1991-A, 8.00%, 08/15/20 ........................................... 5,647
15,000 Series 1991-A, 8.00%, 08/15/21 ........................................... 16,939
13,400,000 Series 1991-A, Pre-Refunded, 8.00%, 03/15/14 ............................. 15,509,696
1,115,000 Series 1991-A, Pre-Refunded, 8.00%, 03/15/15 ............................. 1,287,479
3,000,000 Series 1991-A, Pre-Refunded, 8.00%, 03/15/16 ............................. 3,464,070
11,660,000 Series 1991-A, Pre-Refunded, 8.00%, 03/15/17 ............................. 13,463,685
895,000 Series 1991-A, Pre-Refunded, 8.00%, 08/15/20 ............................. 1,055,509
3,165,000 Series 1991-A, Pre-Refunded, 8.00%, 08/15/21 ............................. 3,732,611
1,020,000 Series 1991-B, 8.00%, 06/01/95 ........................................... 1,057,893
1,435,000 Series 1991-B, 8.00%, 06/01/98 ........................................... 1,561,409
4,500,000 Series 1991-B, 8.25%, 06/01/02 ........................................... 5,134,500
10,000,000 Series 1991-B, 7.50%, 02/01/04 ........................................... 10,913,700
1,000,000 Series 1991-B, 8.25%, 06/01/05 ........................................... 1,162,360
15,000,000 Series 1991-B, 7.00%, 02/01/19 ........................................... 15,865,350
20,000,000 Series 1991-C, 7.00%, 08/01/18 ........................................... 21,534,200
1,800,000 Series 1991-D, 8.25%, 08/01/11 ........................................... 2,057,958
11,125,000 Series 1991-D, 8.25%, 08/01/12 ........................................... 12,719,323
7,750,000 Series 1991-D, 8.25%, 08/01/13 ........................................... 8,910,020
85,000 Series 1991-D, 8.25%, 08/01/14 ........................................... 97,722
4,255,000 Series 1991-D, 8.25%, 08/01/14 ........................................... 5,064,301
1,185,000 Series 1991-D, 8.00%, 08/01/16 ........................................... 1,345,105
100,000 Series 1991-D, 8.00%, 08/01/17 ........................................... 113,194
50,000 Series 1991-D, 8.00%, 08/01/18 ........................................... 56,597
30,000 Series 1991-D, 8.00%, 08/01/19 ........................................... 33,863
1,760,000 Series 1991-D, 8.00%, 08/01/99 ........................................... 1,936,616
240,000 Series 1991-D, ETM 08/01/99, 8.00%, 08/01/99 ............................. 271,836
1,315,000 Series 1991-D, Pre-Refunded, 8.00%, 08/01/16 ............................. 1,545,519
4,600,000 Series 1991-D, Pre-Refunded, 8.00%, 08/01/17 ............................. 5,406,380
3,185,000 Series 1991-D, Pre-Refunded, 8.00%, 08/01/18 ............................. 3,753,873
1,970,000 Series 1991-D, Pre-Refunded, 8.00%, 08/01/19 ............................. 2,321,862
5,335,000 Series 1991-F, 8.20%, 11/15/04 ........................................... 6,123,513
160,000 Series 1991-F, 8.25%, 11/15/15 ........................................... 184,658
200,000 Series 1991-F, 8.25%, 11/15/17 ........................................... 230,160
1,840,000 Series 1991-F, Pre-Refunded, 8.25%, 11/15/15 ............................. 2,207,080
2,300,000 Series 1991-F, Pre-Refunded, 8.25%, 11/15/17 ............................. 2,758,850
7,375,000 Series 1992-A, 6.25%, 08/01/21 ........................................... 7,094,603
1,930,000 Series 1992-C, Sub-Series C-1, 7.00%, 08/01/17 ........................... 2,078,050
5,000,000 Series 1992-D, 7.30%, 02/01/01 ........................................... 5,355,150
9,000,000 Series 1992-D, 7.625%, 02/01/15 .......................................... 10,038,060
5,000,000 Series 1992-D, 7.50%, 02/01/16 ........................................... 5,538,350
5,000,000 Series 1992-D, Pre-Refunded, 7.50%, 02/01/17 ............................. 5,538,350
320,000 Series 1993-A, Pre-Refunded, 8.00%, 03/15/13 ............................. 370,381
1,145,000 Series 1993-B, 8.50%, 08/01/09 ........................................... 1,275,450
3,815,000 Series 1993-B, 5.75%, 08/15/09 ........................................... 3,575,113
8,910,000 Series 1993-B, 5.750%, 08/15/15 .......................................... 8,144,542
5,900,000 Series 1993-D, 6.00%, 08/01/06 ........................................... 5,749,845
2,175,000 Series 1993-D, 5.75%, 08/01/15 ........................................... 1,988,298
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
LONG TERM INVESTMENTS (CONT.)
NEW YORK (CONT.)
New York City GO, (cont.)
$ 1,500,000 Series 1993-D, 5.75%, 08/01/16 .................................................. $ 1,368,480
6,500,000 Series 1993-E, 5.60%, 08/01/06 .................................................. 6,141,590
6,950,000 Series 1993-E, 5.625%, 08/01/07 ................................................. 6,532,166
2,445,000 Series 1993-F, 5.50%, 08/01/05 .................................................. 2,307,689
1,750,000 Series 1993-G, 5.70%, 08/01/09 .................................................. 1,631,683
11,750,000 Series 1994-H, Sub-Series H-1, 6.125%, 08/01/09 ................................. 11,436,980
New York City Health & Hospital Authority Local Government Revenue,
5,010,000 Series A, 6.00%, 02/15/07 ....................................................... 4,870,271
17,735,000 Series A, 6.30%, 02/15/20 ....................................................... 17,335,253
New York City Municipal Water Finance Authority, Water & Sewer System Revenue,
11,140,000 Series 1986-B, Pre-Refunded, 7.875%, 06/15/16 ................................... 12,113,747
8,500,000 Series 1987-A, Pre-Refunded, 9.00%, 06/15/17 .................................... 9,697,310
9,685,000 Series 1988-A, Pre-Refunded, 7.00%, 06/15/18 .................................... 10,447,306
2,965,000 Series 1989-B, Pre-Refunded, 7.00%, 06/15/19 .................................... 3,230,397
10,000,000 Series 1991-A, 7.00%, 06/15/15 .................................................. 10,528,900
40,000,000 Series 1991-C, Pre-Refunded, 7.75%, 06/15/20 .................................... 46,540,000
5,100,000 Series 1992-A, 7.10%, 06/15/12 .................................................. 5,435,376
New York State Dormitory Authority Revenue,
26,930,000 City University System Consolidated, Series A, Pre-Refunded, 7.625%,
07/01/20....................................................................... 30,874,706
31,200,000 City University System Consolidated, Series F, Pre-Refunded, 7.875%,
07/01/17 ...................................................................... 36,177,648
3,085,000 Community Colleges, Series A, 5.625%, 07/01/14 .................................. 2,761,538
4,060,000 Court Facilities Lease, Series A, 5.70%, 05/15/22 ............................... 3,605,402
2,000,000 Crossover, Refunding, City University, Series D, 5.75%, 07/01/12 ................ 1,847,280
2,225,000 Crossover, Refunding, City University, Series E, 5.75%, 07/01/11 ................ 2,064,578
500,000 New York State Department of Health, 5.50%, 07/01/23 ............................ 431,465
42,300,000 State University Educational Facilities, Series A, 5.875%, 05/15/17 ............. 39,163,878
22,750,000 State University Educational Facilities, Series A, Pre-Refunded, 7.70%, 05/15/12 26,120,640
8,870,000 State University Educational Facilities, Series A, Pre-Refunded, 7.25%, 05/15/18 10,105,148
1,130,000 State University Educational Facilities, Series A, Pre-Refunded, 7.25%, 05/15/18 1,287,353
4,240,000 State University Educational Facilities, Series B, Refunding, 7.375%, 05/15/14... 4,583,694
2,000,000 State University Educational Facilities, Series B, Refunding, 7.00%, 05/15/16.... 2,099,900
3,540,000 State University Educational Facilities, Series B, Refunding, Pre-Refunded,
7.375%, 05/15/14 .............................................................. 4,005,439
21,310,000 State University Educational Facilities, Series B, Refunding, Pre-Refunded,
7.25%, 05/15/1................................................................. 23,975,242
2,375,000 State University Educational Facilities, Series B, Refunding, Pre-Refunded,
7.25%, 05/15/15................................................................ 2,672,041
New York State Energy Research & Development Authority, Electric Facilities Revenue,
5,000,000 Consolidated Edison Co., N.Y., Inc., Project B, 9.25%, 09/15/22 ................. 5,642,350
17,500,000 Long Island Light, Series A, 7.15%, 06/01/20 .................................... 17,888,850
1,500,000 Long Island Light, Series A, 7.15%, 02/01/22 .................................... 1,533,330
New York State Housing Finance Agency Service Contract Revenue,
12,735,000 Refunding, Pre-Refunded, 7.80%, 09/15/20 ........................................ 14,803,673
15,000,000 Refunding, Series C, 6.125%, 03/15/20 ........................................... 14,173,350
New York State Local Government Assistance Corp.,
6,000,000 dSeries A, 6.50%, 04/01/20 ....................................................... 6,080,340
10,000,000 Series A, Pre-Refunded, 7.125%, 04/01/21 ........................................ 11,332,200
15,740,000 Series C, 6.25%, 04/01/18 ....................................................... 15,738,741
7,215,000 dNew York State Medical Care Facilities Financial Hospital & Nursing Home, FSA
Mortgage Insured, 6.50%, 02/15/34................................................... 7,143,066
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
NEW YORK (CONT.)
New York State Medical Care Facilities Financial Mortgage Project,
$ 7,085,000 Series A, 5.65%, 08/15/13 ..................................................... $ 6,566,874
1,750,000 Series A, 5.90%, 08/15/33 ..................................................... 1,612,888
New York State Mortgage Agency Revenue, Homeowner Mortgage,
4,135,000 Series C-1, 5.65%, 04/01/15 ................................................... 3,806,764
5,000,000 Series C-2, 5.60%, 04/01/15 ................................................... 4,437,000
5,000,000 Warren & Washington Counties IDAR, Refunding, Adirondack Resource Recovery
Project, Series A, 7.90%, 12/15/07................................................ 4,625,000
------------
848,745,446
------------
NORTH CAROLINA 3.5%
North Carolina Eastern Municipal Power Agency, Power System Revenue,
60,480,000 Refunding, Series 1986-A, Pre-Refunded, 7.75%, 01/01/15 ....................... 65,511,331
5,705,000 Refunding, Series 1987-A, Pre-Refunded, 7.50%, 01/01/15 ....................... 6,221,873
18,645,000 Refunding, Series 1988-A, Pre-Refunded, 8.00%, 01/01/21 ....................... 20,947,471
1,355,000 Refunding, Series 1988-A, Pre-Refunded, 8.00%, 01/01/21 ....................... 1,522,329
21,500,000 Refunding, Series 1991-A, 6.50%, 01/01/17 ..................................... 21,271,455
6,875,000 Refunding, Series 1993-B, 6.25%, 01/01/12 ..................................... 6,639,394
39,030,000 Refunding, Series 1993-B, 6.25%, 01/01/23 ..................................... 37,813,825
4,000,000 Refunding, Series 1993-B, FGIC Insured, 6.25%, 01/01/23 ....................... 3,952,280
2,000,000 Series 1993-C, 5.50%, 01/01/07 ................................................ 1,906,920
15,960,000 Series 1993-G, 5.875%, 01/01/14 ............................................... 14,793,643
19,220,000 Series 1993-G, 5.75%, 12/01/16 ................................................ 17,440,420
7,000,000 North Carolina Medical Care Commission Health Care Facilities, 1st Mortgage
Revenue, Southminster Project, 10.375%, 10/01/15.................................. 7,399,980
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue,
14,790,000 Refunding, Series 1982, 6.25%, 01/01/17 ....................................... 14,524,963
10,000,000 Refunding, Series 1985-B, Pre-Refunded, 8.50%, 01/01/17 ....................... 10,852,000
5,000,000 Wake County IPC, Financing Authority Revenue, Carolina Power & Light, 6.90%,
04/01/09..................................................................... 5,293,600
------------
236,091,484
------------
NORTH DAKOTA .9%
7,750,000 Dickinson Health Care Facilities Revenue, BHS Long-Term Care, Inc., 7.625%,
02/15/20.......................................................................... 8,289,555
477,000 Ellendale MFHR, Ellendale Manor Apartments Project, 9.75%, 07/01/16 ................ 495,808
Mercer County PCR,
3,695,000 Basin Electric Power Corp., Series 1984-A, 7.70%, 01/01/19 .................... 3,896,710
15,065,000 Basin Electric Power Corp., Series 1984-B, 8.125%, 01/01/19 ................... 15,986,828
20,260,000 Basin Electric Power Corp., Series 1984-D, 8.125%, 01/01/19 ................... 21,479,854
12,010,000 Basin Electric Power Corp., Series 1984-E, 7.00%, 01/01/19 .................... 12,520,425
908,000 Wahpeton MFHR, Evergreen Apartments Project, 9.75%, 07/01/16 ....................... 943,802
------------
63,612,982
------------
OHIO 1.2%
6,740,000 Franklin County Hospital Facility Mortgage Revenue, Refunding, Presbyterian
Retirement Services, Series 1987-A, 9.00%, 07/01/10............................... 6,891,111
2,940,000 Franklin County Nursing Home, 1st Mortgage Revenue, Volunteers of America Care
Facilities Project, 8.75%, 11/01/18............................................... 2,975,986
Montgomery County Health Systems Revenue,
3,100,000 Franciscan, Series B-2, 8.10%, 07/01/01 ....................................... 3,290,650
12,000,000 Franciscan, Series B-2, 8.10%, 07/01/18 ....................................... 12,935,760
1,680,000 Muskingum County Hospital Facilities Revenue, Care One Health System, Bethesda
Hospital, 8.00%, 12/01/16......................................................... 1,686,182
1,500,000 Muskingum County Revenue, Refunding, Franciscan Health Advisory Service, Good
Samaritan & Holy Family Hospital Project, 7.50%, 03/01/12......................... 1,576,785
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
OHIO (CONT.)
Ohio State Air Quality Development Authority Revenue,
$ 6,325,000 Collateral Pollution Toledo Edison, Series B, 8.00%, 05/15/19 ....................... $ 6,811,962
10,000,000 Dayton Power & Light Co. Project, 9.50%, 12/01/15 ................................... 10,927,400
1,785,000 Ohio State EDR, Good Samaritan Medical Center, Series 1990-3, 7.875%, 12/01/10 ........... 1,884,246
3,250,000 Ohio State Water Development Authority Revenue, Refunding, Water Development
Dayton Power, Series A, 6.40%, 08/15/27................................................. 3,249,578
Ohio State Water Development Facilities Authority, PCR,
4,000,000 Cleveland Electric Illumination Co. Project, Series A-1, 9.75%, 11/01/22 ............ 4,398,360
10,000,000 Cleveland Electric Illumination Co. Project, Series A-2, 9.75%, 11/01/22 ............ 10,979,600
2,375,000 Duquesne Light Co., Perry Nuclear Station Project, Series 1985-A, 11.125%,
02/01/15........................................................................... 2,546,784
10,000,000 Toledo Edison, Series A, 8.00%, 05/15/19 ............................................ 10,811,300
-----------
80,965,704
-----------
OKLAHOMA 1.6%
970,000 Canadian County HFA, MFHR, Heritage Park Apartment Project, 9.00%, 02/01/02 .............. 891,643
Canadian County HFA, SFMR,
2,315,000 Series 1990-A, 7.70%, 09/01/05 ...................................................... 2,398,919
4,830,000 Series 1990-A, 7.80%, 09/01/12 ...................................................... 5,011,125
6,000,000 Jackson County Memorial Hospital Authority Revenue, Refunding, Jackson Memorial
Hospital Project, 9.00%, 08/01/15 ...................................................... 6,326,460
Oklahoma State Municipal Power Authority, Power Supply System Revenue,
7,000,000 Series A, Pre-Refunded, 8.25%, 01/01/23 ............................................. 7,562,940
20,000,000 Series B, Pre-Refunded, 8.25%, 01/01/23 ............................................. 21,608,400
Oklahoma State Turnpike System Authority,
610,000 1st Senior Revenue, 7.875%, 01/01/21 ................................................ 674,196
19,090,000 1st Senior Revenue, Pre-Refunded, 7.875%, 01/01/21 .................................. 21,644,815
2,755,000 Tulsa County Home Financial Authority, MFHR, Breckenridge Apartments Project,
Series A, FGIC Insured, 6.45%, 10/01/34................................................. 2,715,824
790,000 Tulsa County Home Financial Authority, Mortgage Revenue, Series D, GNMA Insured,
6.95%, 12/01/22......................................................................... 815,912
11,000,000 Tulsa County Municipal Airport Revenue, American Airlines, Inc., 7.375%, 12/01/20......... 11,099,660
Tulsa County Parking Authority,
3,000,000 Series B, 6.90%, 12/01/07 ........................................................... 3,181,590
5,500,000 Series B, 7.00%, 12/01/14 ........................................................... 5,835,060
Tulsa County Public Facilities Authority,
2,000,000 Recreation Facility Revenue, Pre-Refunded, 8.875%, 02/01/03 ......................... 2,306,740
2,000,000 Recreation Facility Revenue, Pre-Refunded, 9.00%, 02/01/08 .......................... 2,315,180
2,740,000 Tulsa Housing Assistance Corp., 1st Lien Revenue, Refunding, 6.80%, 07/01/11 ............. 2,784,141
2,000,000 Tulsa Industrial Authority Hospital Revenue, St. John Medical Center Project, Series A,
6.25%, 02/15/14......................................................................... 1,944,540
2,450,000 Tulsa Industrial Authority, MFHR, Country Club Woodland Hills, GNMA Mortgage
Backed Securities, 9.375%, 12/01/25..................................................... 2,626,155
4,000,000 Tulsa Municipal Airport Revenue, American Airlines-American Corp., 7.35%, 12/01/11........ 4,067,200
-----------
105,810,500
-----------
PENNSYLVANIA 5.3%
Beaver County IDA, PCR,
9,500,000 Collateralized, Cleveland Electric Co., Illuminating Co., 10.50%, 09/01/15 ............... 10,231,405
2,850,000 Ohio Edison Co., Beaver Valley Project, Series A, 10.50%, 10/01/15 ....................... 3,117,957
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital,
5,000,000 Refunding, Series A, Pre-Refunded, 10.125%, 07/01/18 ................................ 5,451,650
9,600,000 Refunding, Series B, 6.30%, 07/01/08 ................................................ 9,728,256
10,740,000 Refunding, Series B, 6.375%, 07/01/18 ............................................... 10,627,874
3,000,000 Refunding, Series B, Pre-Refunded, 8.875%, 07/01/18 ................................. 3,482,070
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
PENNSYLVANIA (CONT.)
Delaware County IDAR, Refunding,
$ 6,500,000 Philadelphia Electric, Series 1991, 7.375%, 04/01/21 ....................... $ 6,816,615
41,300,000 Resource Recovery Project, Series A, 8.10%, 12/01/13 ....................... 44,395,022
3,030,000 Fayette County Hospital Authority Revenue, Uniontown Hospital Project, 9.75%,
07/01/15....................................................................... 3,231,980
22,500,000 Lancaster County Solid Waste Management Authority, Resource Recovery System
Revenue, Series A, 8.50%, 12/15/10............................................. 25,301,250
Montgomery County Higher Education and Health Authority, Hospital Revenue,
5,150,000 Frankford Hospital, 7.875%, 01/01/19 ....................................... 5,313,255
5,500,000 Jeanes Health System Project, Pre-Refunded, 8.75%, 07/01/20 ................ 6,602,915
5,000,000 Montgomery County IDA, PCR, Philadelphia Electric Co., Series 1986-A, 8.875%,
06/01/16....................................................................... 5,435,400
Pennsylvania Intergovernmental Cooperative Authority, Special Tax Revenue,
7,325,000 City of Philadelphia, Funding Program, Pre-Refunded, 6.80%, 06/15/12 ....... 8,015,748
14,575,000 City of Philadelphia, Funding Program, Pre-Refunded, 6.80%, 06/15/22 ....... 15,949,423
30,000,000 Pennsylvania State Financial Authority Revenue, Refunding, Municipal Capital
Improvements Program, 6.60%, 11/01/09.......................................... 30,336,300
Pennsylvania State HFA,
10,225,000 Refunding, Rental Housing, 5.75%, 07/01/14 ................................. 9,553,933
10,590,000 Refunding, Rental Housing, FGIC Insured, 6.40%, 07/01/12 ................... 10,698,971
4,200,000 SFM, Series 1991, 7.15%, 04/01/15 ............................................... 4,306,134
2,000,000 Pennsylvania State Higher Educational Facilities Authority, College and University
Revenues, Lycoming College, Pre-Refunded, 8.375%, 10/01/18 .................... 2,293,260
4,445,000 Pennsylvania State Pooled Finance Authority, Lease Revenue, Capital Improvement,
Series B, MBIA Insured, 8.00%, 11/01/09 ....................................... 4,671,784
Philadelphia City GO, Refunding,
26,000,000 Series 1986-A, Pre-Refunded, 7.625%, 08/01/16 .............................. 28,178,020
1,000,000 Series 1987-A, 11.50%, 08/01/97 ............................................ 1,160,990
1,545,000 Series 1987-A, 11.50%, 08/01/98 ............................................ 1,842,490
2,400,000 Series 1987-A, 11.50%, 08/01/99 ............................................ 2,933,232
1,000,000 Series 1987-A, 11.50%, 08/01/00 ............................................ 1,248,140
3,000,000 Series 1993-A, FGIC Insured, 5.10%, 05/15/02 ............................... 2,970,780
2,850,000 Philadelphia Gas Works Revenue, Series 13, Pre-Refunded, 7.70%, 06/15/21 ........ 3,308,252
3,950,000 Philadelphia Gas Works Revenue, Series A, 6.375%, 07/01/26 ...................... 3,836,714
Philadelphia Hospital & Higher Education Facilities Authority, Hospital Revenue,
14,240,000 Albert Einstein Medical Center, 7.50%, 04/01/99 ............................ 15,146,803
8,000,000 Nazareth Hospital, 9.375%, 07/01/15 ........................................ 8,246,480
Philadelphia Housing RDAR,
840,000 Sub-Series 2-A, 8.375%, 02/01/14 ........................................... 852,155
4,140,000 Sub-Series 2-B, 8.625%, 08/01/26 ........................................... 4,200,196
1,000,000 Philadelphia Municipal Authority, Gas Works Lease Revenue, 7.50%, 05/01/01 ...... 1,085,910
Philadelphia Water & Sewer Revenue,
10,960,000 Series 10, ETM 09/01/04, 7.35%, 09/01/04 ................................... 12,136,337
20,180,000 Series 16, 7.50%, 08/01/10 ................................................. 21,861,398
10,450,000 Series 16, CGIC Insured, Pre-Refunded, 7.00%, 08/01/21 ..................... 11,715,286
Philadelphia Water & Wastewater Revenue,
9,500,000 Refunding, 5.50%, 06/15/06 ................................................. 9,110,405
3,485,000 Refunding, 5.75%, 06/15/13 ................................................. 3,165,669
410,000 Warrington Township Municipal Authority, Water and Sewer Revenue, Bucks County,
Series A, 10.50%, 12/01/10..................................................... 438,499
3,000,000 Westmoreland County IDAR, Refunding, Citizens General Hospital Project, Series A,
8.25%, 07/01/13................................................................ 3,221,880
------------
362,220,838
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
PUERTO RICO .6%
$ 3,200,000 Puerto Rico Commonwealth Urban Renewal & Housing Corp., Refunding, 7.875%,
10/01/04........................................................................ $ 3,574,656
Puerto Rico Electric Power Authority, Power Revenue, Refunding,
4,000,000 Series 1987-K, Pre-Refunded, 9.375%, 07/01/17................................ 4,626,040
2,000,000 Series 1988-M, Pre-Refunded, 8.00%, 07/01/08 ................................ 2,268,600
5,000,000 Puerto Rico Municipal Finance Agency, Series 1988-A, 8.25%, 07/01/08 ............. 5,561,850
26,925,000 Puerto Rico PBA, Guaranteed, Public Education and Health Facilities, Refunding,
Series M, 5.75%, 07/01/15....................................................... 24,997,170
------------
41,028,316
------------
RHODE ISLAND 1.5%
Rhode Island Depositors Economic Protection Corp., Special Obligation,
15,000,000 Series A, 5.75%, 08/01/14 ................................................... 13,997,100
6,500,000 Series A, Pre-Refunded, 6.90%, 08/01/13 ..................................... 7,247,435
12,700,000 Series A, Pre-Refunded, 6.95%, 08/01/22 ..................................... 14,202,283
7,000,000 Series B, 6.00%, 08/01/17 ................................................... 6,671,000
Rhode Island Housing and Mortgage Finance Corp., Homeownership Opportunity,
1,925,000 Series 2, 7.75%, 04/01/22 ................................................... 2,044,850
9,500,000 Series 9-C, 5.75%, 04/01/17 ................................................. 8,751,685
20,200,000 Series 10-A, 6.50%, 10/01/22 ................................................ 20,304,434
13,085,000 Series 10-A, 6.50%, 04/01/27 ................................................ 13,152,649
Rhode Island State Health & Educational Building Corp. Revenue,
3,000,000 Health Facilities Tockwotton Home, 7.25%, 04/15/17 .......................... 3,108,390
9,000,000 Higher Educational Facilities, Project J, 5.875%, 04/01/20 .................. 8,341,290
970,000 Roger William Realty, FHA Insured, 7.50%, 08/01/29 .......................... 1,003,115
2,320,000 St. Antoine Residence, 6.70%, 11/15/12 ...................................... 2,290,884
2,750,000 St. Antoine Residence, 6.75%, 11/15/18 ...................................... 2,711,033
------------
103,826,148
------------
SOUTH CAROLINA 1.5%
24,000,000 Charleston County Resource Recovery Revenue, Foster Wheeler Charleston Resource
Recovery Inc. Project, Series A, 9.25%, 01/01/10............................... 27,000,000
North Charleston Redevelopment Commission, Housing Development Revenue,
505,000 Phoenix Park Project, Series A, 9.00%, 01/01/97 ............................ 151,500
8,175,000 Phoenix Park Project, Series A, 9.50%, 01/01/17 ............................ 2,452,500
Piedmont Municipal Power Agency, South Carolina Electric Revenue,
6,000,000 Refunding, 7.25%, 01/01/22 ................................................. 6,298,140
6,000,000 Refunding, 6.375%, 01/01/25 ................................................ 5,979,300
7,750,000 Refunding, Series A, 5.75%, 01/01/24 ....................................... 6,989,183
South Carolina State Public Service Authority Revenue, Refunding,
15,805,000 Electric System & Expansion, Series A, 7.875%, 07/01/21 .................... 16,801,663
4,175,000 Electric System & Expansion, Series A, Pre-Refunded, 7.875%, 07/01/21 ...... 4,491,632
10,600,000 Santee Cooper Electric System & Expansion, Series B, Pre-Refunded, 6.50%,
07/01/26.................................................................. 11,560,254
York County Public Facilities Corp., COP,
10,240,000 Justice Center, 7.50%, 06/01/11 ............................................ 11,793,203
4,500,000 Justice Center, Pre-Refunded, 7.375%, 06/01/04 ............................. 5,149,575
------------
98,666,950
------------
SOUTH DAKOTA .5%
5,000,000 Lawrence County PCR, Refunding, Black Hills Power & Light Co. Project, 6.70%,
06/01/10....................................................................... 5,169,700
South Dakota State HDA, Homeownership Mortgage,
1,250,000 Series A, 6.00%, 05/01/21 .................................................. 1,192,288
10,580,000 Series A, 7.15%, 05/01/27 .................................................. 10,976,750
4,650,000 Series B, 5.80%, 05/01/14 .................................................. 4,377,650
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
SOUTH DAKOTA (CONT.)
South Dakota State HDA, Homeownership Mortgage, (cont.)
$ 3,250,000 Series B, 7.10%, 05/01/17 ..................................................... $ 3,372,135
4,350,000 Series C, 5.70%, 05/01/13 ..................................................... 4,067,816
1,750,000 Series C, 5.75%, 05/01/17 ..................................................... 1,625,908
3,480,000 dSeries D, 6.65%, 05/01/14 .................................................... 3,468,516
------------
34,250,763
------------
TENNESSEE .8%
6,690,000 Gatlinburg COP, Gatlinburg Convention Center, Inc., Pre-Refunded, 9.25%, 12/01/12 7,829,842
4,870,000 Knox County Health, Educational & Housing Facilities Board, MFHR, GNMA
Collateralized, East Towne Village Project, 8.20%, 07/01/28....................... 5,014,396
Memphis-Shelby County Airport Authority, Special Facilities & Project Revenue,
14,690,000 Federal Express Corp., 7.875%, 09/01/09 ....................................... 16,071,300
6,520,000 Federal Express Corp., 6.75%, 09/01/12 ........................................ 6,465,036
1,990,000 Mount Pleasant IDR, PCR, Stauffer Chemical Co. Project, 8.00%, 12/01/12 ............ 2,256,501
5,000,000 Nashville & Davidson County Revenue, IDB, Refunding & Improvement, Osco
Treatment, Inc., 6.00%, 05/01/03.................................................. 4,868,150
7,405,000 Tennessee HDA, Homeownership Program, Series P, 7.70%, 07/01/16 .................... 7,816,496
2,000,000 Tennessee HDA, Mortgage Finance, Refunding, Series A, 5.90%, 07/01/18 .............. 1,834,120
2,650,000 Tennessee State Local Development Authority Revenue, Refunding, State Loan
Program, Series A, 5.65%, 03/01/07................................................ 2,479,844
------------
54,635,685
------------
TEXAS 8.0%
18,100,000 Austin Combined Utility System Revenue, Series A, Pre-Refunded, 8.00%, 11/15/16 21,015,548
85,000 Austin HFC, SFMR, Series 1984, 11.25%, 02/01/09 .................................... 88,153
1,750,000 Bexar County HFC, MFHR, Sunpark Apartments Project, 6.875%, 12/01/12 ............... 1,802,325
6,100,000 Brazos County Health Facilities Development Corp., Hospital Revenue, St. Joseph
Hospital Project, Pre-Refunded, 10.25%, 10/01/15.................................. 7,235,576
9,000,000 Brazos County Higher Education Authority, Student Loan Revenue, Refunding,
Series C-2, 5.875%, 06/01/04...................................................... 8,828,910
Brazos River Authority, Collateralized, PCR, Texas Utilities Electric Co. Project,
2,500,000 Series 1987-A, 9.875%, 10/01/17 ............................................... 2,844,750
17,550,000 Series 1988-A, 9.25%, 03/01/18 ................................................ 19,761,476
15,000,000 Series 1989-A, 8.25%, 01/01/19 ................................................ 16,412,100
Brazos River Authority, Johnson County,
410,000 Surface Water & Treatment Revenue, 8.40%, 09/01/95 ............................ 431,566
445,000 Surface Water & Treatment Revenue, 8.60%, 09/01/96 ............................ 479,621
480,000 Surface Water & Treatment Revenue, 8.75%, 09/01/97 ............................ 516,178
520,000 Surface Water & Treatment Revenue, 8.90%, 09/01/98 ............................ 557,939
560,000 Surface Water & Treatment Revenue, 9.00%, 09/01/99 ............................ 598,914
605,000 Surface Water & Treatment Revenue, 9.00%, 09/01/00 ............................ 645,015
655,000 Surface Water & Treatment Revenue, 9.00%, 09/01/01 ............................ 696,861
705,000 Surface Water & Treatment Revenue, 9.10%, 09/01/02 ............................ 749,993
765,000 Surface Water & Treatment Revenue, 9.10%, 09/01/03 ............................ 812,124
825,000 Surface Water & Treatment Revenue, 9.10%, 09/01/04 ............................ 875,820
890,000 Surface Water & Treatment Revenue, 9.20%, 09/01/05 ............................ 945,732
960,000 Surface Water & Treatment Revenue, 9.20%, 09/01/06 ............................ 1,020,115
1,040,000 Surface Water & Treatment Revenue, 9.20%, 09/01/07 ............................ 1,102,826
1,120,000 Surface Water & Treatment Revenue, 9.20%, 09/01/08 ............................ 1,187,659
1,210,000 Surface Water & Treatment Revenue, 9.25%, 09/01/09 ............................ 1,281,705
1,310,000 Surface Water & Treatment Revenue, 9.25%, 09/01/10 ............................ 1,387,631
1,415,000 Surface Water & Treatment Revenue, 9.25%, 09/01/11 ............................ 1,497,296
1,525,000 Surface Water & Treatment Revenue, 9.25%, 09/01/12 ............................ 1,613,694
1,650,000 Surface Water & Treatment Revenue, 9.25%, 09/01/13 ............................ 1,745,964
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
TEXAS (CONT.)
Brazos River Authority, Johnson County, (cont.)
$ 1,780,000 Surface Water & Treatment Revenue, 9.25%, 09/01/14 .............................. $ 1,883,524
1,670,000 Surface Water & Treatment Revenue, 9.25%, 09/01/15 .............................. 1,767,127
750,000 Brownsville Utilities System Revenue, Refunding, Series 1984, 11.625%, 09/01/14 ...... 792,345
15,745,000 Dallas County Flood Control District No. 1, Refunding, Mandatory Put 04/01/97, 9.25%,
04/01/10 ........................................................................... 16,470,529
3,470,000 Dallas County Flood Control District No. 1, Refunding, Pre-Refunded, 9.25%,
04/01/10 ........................................................................... 3,885,463
99,000,000 Dallas-Fort Worth, International Airport Facilities, Improvement Corp. Revenue,
American Airlines, Inc., 8.00%, 11/01/24 ........................................... 104,282,640
30,000 Denton County HFC, SFMR, 11.75%, 01/01/11 ............................................ 30,473
7,255,000 El Paso HFC, SFMR, Series 1991-A, 8.75%, 10/01/11 .................................... 7,439,567
2,050,000 Grand Prairie HFC, SFMR, 10.75%, 09/01/14 ............................................ 2,096,781
43,010,000 Harris County Hospital District Mortgage Revenue, Refunding, Pre-Refunded, 8.50%,
04/01/05 ........................................................................... 46,917,459
20,000,000 Harris County IDR, Marine Terminal Revenue, Refunding, 6.95%, 02/01/22 ............... 20,595,400
Harris County Toll Road, Multiple Mode, Senior Lien Revenue,
2,100,000 Refunding, Series 1987, Pre-Refunded, 8.70%, 08/15/17............................ 2,403,996
9,000,000 Series B, Pre-Refunded, 8.625%, 08/15/07 ........................................ 10,282,590
18,710,000 Series B, Pre-Refunded, 8.70%, 08/18/17 ......................................... 21,418,460
3,500,000 Series C, Pre-Refunded, 8.125%, 08/15/17 ........................................ 3,980,900
4,000,000 Series D, Pre-Refunded, 8.25%, 08/15/07 ......................................... 4,603,240
5,000,000 Series D, Pre-Refunded, 8.30%, 08/15/17 ......................................... 5,763,550
9,370,000 Houston HFC, SFMR, Refunding, Series A, FSA Insured, 5.95%, 12/01/10 ................. 9,072,503
21,000,000 dHouston Water & Sewer System Revenue, Refunding, Series B, 6.375%, 12/01/14 .......... 20,820,660
Matagorda County Navigation District No. 1, PCR, Collateralized, Refunding,
10,000,000 Houston Lighting & Power Co., 6.00%, 07/01/28 ................................... 9,264,900
40,975,000 Houston Lighting & Power Co., Series B, 7.70%, 02/01/19 ......................... 44,284,550
2,040,000 Mesquite HFC, SFMR, Series 1983, 10.75%, 09/01/14 .................................... 2,035,981
5,000,000 Nueces County Hospital District Revenue, Refunding, Pre-Refunded, 9.00%, 07/01/16 .... 5,566,500
11,000,000 Rio Grande Valley Health Facilities Development Corp., 1st Mortgage Revenue,
Refunding, Golden Palms Retirement and Health Center, Pre-Refunded, 9.25%,
08/01/5 ............................................................................ 12,348,930
2,610,000 Sabine River Authority PCR, Texas Utility Electric Co. Project, Refunding, 7.75%,
04/01/16 ........................................................................... 2,749,452
5,000,000 San Antonio Water Revenue, Refunding, MBIA Insured, 6.50%, 05/15/10 .................. 5,159,550
Southland Oaks MUD,
1,525,000 Contract Revenue, Pre-Refunded, 8.50%, 11/15/01 ................................. 1,686,391
1,700,000 Contract Revenue, Pre-Refunded, 8.50%, 11/15/02 ................................. 1,879,911
1,850,000 Contract Revenue, Pre-Refunded, 8.50%, 11/15/03 ................................. 2,045,786
2,050,000 Contract Revenue, Pre-Refunded, 8.55%, 11/15/04 ................................. 2,269,371
2,250,000 Contract Revenue, Pre-Refunded, 8.55%, 11/15/05 ................................. 2,490,773
2,475,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/06 ................................. 2,742,770
2,725,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/07 ................................. 3,019,818
3,000,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/08 ................................. 3,324,570
3,300,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/09 ................................. 3,657,027
Texas Housing Agency,
17,605,000 SFMR, Series 1986-B, 7.50%, 09/01/17 ........................................... 18,063,610
4,620,000 SFMR, Series 1987-B, 8.20%, 03/01/16 ........................................... 4,859,039
Texas Housing Agency, Residential Development Mortgage Revenue,
2,270,000 Series D, 8.35%, 01/01/08 ...................................................... 2,363,138
4,575,000 Series D, 8.35%, 07/01/08 ...................................................... 4,762,712
18,000,000 Texas National Research Lab Community, Financing Corp., Lease Revenue, 7.10%,
12/01/21 .......................................................................... 18,205,020
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
TEXAS (CONT.)
$ 4,160,000 Texas State Department Housing and Community Affairs, MFR, Mortgage National
Center Housing Management Project, FSA Insured, 5.80%, 01/01/24 $ 3,783,853
2,500,000 Texas Water Resources Finance Authority Revenue, 7.625%, 08/15/08 .............. 2,694,050
Western Oaks MUD,
1,675,000 Contract Revenue, 8.60%, 11/15/05 ......................................... 1,856,218
1,825,000 Contract Revenue, 8.60%, 11/15/06 ......................................... 2,022,447
615,000 Contract Revenue, Pre-Refunded, 8.40%, 11/15/01 ........................... 678,634
500,000 Contract Revenue, Pre-Refunded, 8.45%, 11/15/02 ........................... 552,325
2,025,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/07 ........................... 2,244,085
2,225,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/08 ........................... 2,465,723
2,450,000 Contract Revenue, Pre-Refunded, 8.60%, 11/15/09 ........................... 2,715,066
------------
552,434,898
------------
U.S. TERRITORIES
870,000 Virgin Islands HFA, HMR, Series B, GNMA Mortgage Backed Securities, 8.10%,
12/01/18 907,575
------------
UTAH 1.9%
Intermountain Power Agency, Power Supply Revenue, Refunding,
34,805,000 Series B, 7.75%, 07/01/20 ................................................. 38,160,898
2,000,000 Series G, 7.25%, 07/01/17 ................................................. 2,115,160
4,000,000 Series I, 6.00%, 07/01/21 ................................................. 3,905,400
Intermountain Power Agency, Special Obligation,
13,450,000 1st Crossover Series, 7.875%, 07/01/14 .................................... 14,459,019
9,500,000 Refunding, 5th Crossover Series, 7.20%, 07/01/19 .......................... 10,132,130
2,945,000 dUtah State HFA, Refunding, Series A, 6.50%, 05/01/19 .......................... 2,952,186
Utah State HFA, SFM,
5,115,000 Refunding, Series A-C, 6.80%, 01/01/12 .................................... 5,300,214
2,565,000 Series A, 8.50%, 07/01/19 ................................................. 2,652,620
6,575,000 Series A, 5.70%, 07/01/26 ................................................. 5,884,756
5,000,000 dSeries B, 6.55%, 07/01/26 ................................................ 5,000,000
510,000 Series C-1, 6.80%, 07/01/12 ............................................... 528,467
8,845,000 Series C-1, 8.375%, 07/01/19 .............................................. 9,064,444
2,945,000 Series D, 8.60%, 07/01/19 ................................................. 3,088,510
4,110,000 Series G-1, 8.10%, 07/01/16 ............................................... 4,237,903
2,150,000 Series F, 6.00%, 07/01/13 ................................................. 2,071,675
Utah State School District Finance Cooperative Revenue, Financing Pool,
2,450,000 Series 1988, 8.375%, 02/15/10 ............................................. 2,661,386
1,730,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,879,264
1,435,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,558,812
1,420,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,542,518
1,340,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,455,615
1,245,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,352,418
1,210,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,314,399
1,195,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,298,105
1,190,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,316,687
1,160,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,260,085
1,065,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,156,888
1,040,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,142,762
1,030,000 Series 1988, 8.375%, 02/15/10 ............................................. 1,118,868
635,000 Series 1988, 8.375%, 02/15/10 ............................................. 685,711
530,000 Series 1988, 8.375%, 02/15/10 ............................................. 560,046
490,000 Series 1988, 8.375%, 02/15/10 ............................................. 503,524
------------
130,360,470
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
VIRGINIA .3%
Virginia State HDA, Commonwealth Mortgage,
$13,200,000 Series 1989-B, Sub-Series B-1, 7.75%, 07/01/17 ............................. $13,827,000
5,120,000 dSeries 1994-C, Sub-Series C-6, 6.25%, 01/01/15 ............................ 4,924,518
-----------
18,751,518
-----------
WASHINGTON 5.8%
Chelan County PUD No. 1,
5,000,000 Chelan Hydro Consolidated System Revenue, 9.30%, 07/01/62 .................. 5,638,450
6,000,000 Chelan Hydro Consolidated System Revenue, Mandatory Put 06/01/18,
Pre-Refunded, 6.95%, 06/01/67............................................. 6,640,980
4,885,000 Chelan Hydro Consolidated System Revenue, Series E, 5.70%, 07/01/09 ........ 4,517,599
8,500,000 Clark County School District No. 37, 5.90%, 12/01/12 ............................ 8,395,705
Lewis County PUD No. 1,
10,000,000 Cowlitz Falls Hydroelectric Revenue, 5.50%, 10/01/22 ....................... 8,653,200
27,500,000 Cowlitz Falls Hydroelectric Revenue, Pre-Refunded, 7.00%, 10/01/22 ......... 30,883,600
10,215,000 dKing County School District No. 406 South Central, 6.125%, 12/01/13 ............ 10,071,377
King County School District No. 411,
5,000,000 Issaquah, Series A, 5.80%, 12/01/10 ........................................ 4,839,600
3,000,000 Issaquah, Series A, 5.85%, 12/01/11 ........................................ 2,900,850
4,020,000 Marysville Water & Sewer Revenue, Refunding, MBIA Insured, 6.10%, 12/01/12 ...... 3,928,183
32,480,000 Pierce County, EDC, Revenue, Refunding, Solid Waste-Steilacoom, 6.60%, 08/01/22 32,106,480
Port Moses Lake Public Corp., Washington PCR,
2,100,000 Union Carbide Corp., 7.50%, 08/01/04 ....................................... 2,181,354
1,000,000 Union Carbide Corp., 7.875%, 08/01/06 ...................................... 1,055,790
Seatac GO,
540,000 Series 1994, 5.40%, 12/01/00 ............................................... 539,973
635,000 Series 1994, 5.75%, 12/01/03 ............................................... 634,968
2,760,000 Series 1994, 6.50%, 12/01/13 ............................................... 2,759,807
Snohomish County PUD No. 1, Electric Revenue, Refunding, Generation System,
1,600,000 Series 1986-A, 5.70%, 01/01/14 ............................................. 1,462,080
9,365,000 Series 1986-A, Pre-Refunded, 8.00%, 01/01/15 ............................... 10,309,367
7,000,000 Snohomish County USD No. 6, 6.50%, 12/01/11 ..................................... 7,252,840
Washington State Health Care Facilities Authority Revenue,
3,615,000 Heart Institute Spokane, Series A, 5.80%, 08/15/18 ......................... 3,270,996
4,000,000 Refunding, Dominican Health Services, 5.75%, 06/01/13 ...................... 3,666,360
9,315,000 Refunding, Northwest Hospital, AMBAC Insured, 5.75%, 11/15/23 .............. 8,413,774
4,880,000 Washington State Housing Finance Commission, MFMR, Refunding, Series A, 7.90%,
07/01/30 ...................................................................... 4,948,808
820,000 Washington State Housing Finance Commission, SFMR, Refunding, Mortgage Backed
Securities, Series B-1, 5.95%, 07/01/16 ....................................... 782,132
Washington State Public Power Supply System Revenue, Nuclear Project No. 1,
Refunding,
1,000,000 Series A, 5.25%, 07/01/08 .................................................. 892,180
18,330,000 Series A, 6.00%, 07/01/09 .................................................. 17,589,101
1,500,000 Series A, 7.00%, 07/01/11 .................................................. 1,554,375
22,400,000 Series A, 6.00%, 07/01/12 .................................................. 21,168,448
35,355,000 Series A, 6.05%, 07/01/12 .................................................. 33,240,417
23,970,000 dSeries A, 6.50%, 07/01/15 ................................................. 23,776,802
19,250,000 Series A, 6.00%, 07/01/17 .................................................. 17,951,780
10,705,000 Series A, 6.25%, 07/01/17 .................................................. 10,639,057
32,000,000 Series A, Pre-Refunded, 7.625%, 07/01/08 ................................... 36,596,160
17,000,000 Series A, Pre-Refunded, 7.375%, 07/01/12 ................................... 19,220,030
4,000,000 Series C, Pre-Refunded, 7.625%, 07/01/10 ................................... 4,583,920
5,000,000 Series C, Pre-Refunded, 8.00%, 07/01/17 .................................... 5,821,700
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
WASHINGTON (CONT.)
$ 1,000,000 Washington State Public Power Supply System Revenue, Nuclear Project No. 2,
Refunding, Series A, MBIA Insured, 5.00%, 07/01/09........................... $ 896,700
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Refunding,
13,460,000 Series 1989-B, Pre-Refunded, 7.25%, 07/01/15 ............................. 15,031,724
1,260,000 Series 1990-B, Pre-Refunded, 7.50%, 07/01/18 ............................. 1,432,759
12,945,000 Series B, 5.70%, 07/01/10 ................................................ 12,015,031
750,000 Series B, 5.625%, 07/01/12 ............................................... 679,095
9,500,000 Series B, 5.70%, 07/01/18 ................................................ 8,505,065
------------
397,448,617
------------
WEST VIRGINIA 1.0%
1,250,000 Clarksburg Water Revenue, Pre-Refunded, 10.875%, 02/01/20 ...................... 1,339,675
New Martinsville Building Commission Revenue, City of New Martinsville Project,
3,015,000 Series A, Pre-Refunded, 8.50%, 11/01/03 .................................. 3,377,493
4,250,000 Series A, Pre-Refunded, 8.75%, 11/01/09 .................................. 4,912,022
2,400,000 Taylor County PCR, Union Carbide Corp., 7.625%, 08/01/05 ...................... 2,634,696
5,400,000 West Virginia State Hospital Finance Authority, Hospital Revenue, Refunding,
St. Francis Hospital, Charleston, 7.75%, 08/15/13............................ 5,267,430
West Virginia State Housing Development Fund, Housing Finance,
6,000,000 Series D, 7.00%, 05/01/17 ................................................ 6,151,320
9,000,000 Series D, 7.05%, 11/01/24 ................................................ 9,252,900
11,750,000 West Virginia State School Building Authority Revenue, Capital Improvement, Series A,
MBIA Insured, 6.625%, 07/01/22............................................... 12,219,530
West Virginia State Water Development Authority Revenue,
5,000,000 Loan Program II, Series 1988-A, Pre-Refunded, 8.625%, 11/01/28 ........... 5,793,850
13,085,000 Loan Program II, Series 1990-A, Pre-Refunded, 7.70%, 11/01/29 ............ 15,093,155
5,180,000 dLoan Program II, Series 1991-A, 7.00%, 11/01/31 .......................... 5,302,300
------------
71,344,371
------------
WISCONSIN 1.1%
2,200,000 Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ..................... 2,289,078
Wisconsin Housing & EDA, Homeownership Revenue,
10,230,000 Series 1, 6.75%, 09/01/15 ................................................ 10,439,613
3,000,000 Series 1, 6.75%, 09/01/17 ................................................ 3,061,470
5,500,000 dSeries A, 6.45%, 03/01/17 ................................................ 5,500,000
11,330,000 Series A, 7.10%, 03/01/23 ................................................ 11,799,515
3,000,000 Series B, 7.05%, 11/01/22 ................................................ 3,096,720
13,145,000 Wisconsin Housing & EDA, Housing Revenue, Refunding, Series C, 5.80%, 11/01/13 . 12,190,804
15,360,000 Wisconsin State Health & Educational Facilities Authority Revenue, Lindengrove, Inc.
Project, 10.00%, 10/01/17.................................................... 16,782,336
7,400,000 Wisconsin State Health Facilities Authority Revenue, Refunding, Franciscan Health
Advisory, 7.80%, 03/01/14.................................................... 7,695,556
------------
72,855,092
------------
WYOMING .5%
Wyoming CDA, MF Mortgage,
1,715,000 Series A, 6.90%, 06/01/12 ................................................ 1,754,822
3,530,000 Series A, 6.95%, 06/01/24 ................................................ 3,611,790
Wyoming CDA, SFM,
4,000,000 Series A, 5.70%, 06/01/13 ................................................ 3,714,640
5,750,000 Series A, 5.85%, 06/01/13 ................................................ 5,434,325
2,500,000 Series A, 7.25%, 06/01/21 ................................................ 2,587,125
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
WYOMING (CONT.)
Wyoming CDA, SFM, (cont.)
$14,825,000 Series A, 6.00%, 06/01/23 .................................................... $ 13,953,141
1,730,000 Series G, 7.375%, 06/01/17 ................................................... 1,804,580
--------------
32,860,423
--------------
TOTAL BONDS (COST $6,295,849,964) 6,575,322,981
--------------
fZERO COUPON BONDS 1.4%
11,040,000 Calcasieu Parish, Memorial Hospital Service District Revenue, Lake Charles Parish
Memorial Hospital Project, Series A, (original accretion rate 5.59%), 12/01/22... 5,302,512
16,000,000 Chicago Residential Mortgage Revenue, Refunding, Series B, MBIA Insured, (original
accretion rate 7.30%), 10/01/09 ................................................. 5,382,080
Colorado Springs Airport Revenue,
1,660,000 Series C, (original accretion rate 6.86%), 01/01/03 .......................... 968,909
1,610,000 Series C, (original accretion rate 6.966%), 01/01/05 ......................... 812,809
1,675,000 Series C, (original accretion rate 7.07%), 01/01/07 .......................... 725,794
800,000 Series C, (original accretion rate 7.07%), 01/01/08 .......................... 320,216
1,450,000 Series C, (original accretion rate 7.176%), 01/01/11 ......................... 459,592
5,935,000 dColdwater Community Schools, MBIA Insured, (original accretion rate 6.794%),
05/01/18 ........................................................................ 1,193,529
Jefferson County, Capital Projects Corp., Lease Revenue, Refunding,
1,640,000 Series A, (original accretion rate 6.75%), 08/15/07 .......................... 686,389
4,505,000 Series A, (original accretion rate 6.80%), 08/15/08 .......................... 1,753,572
4,580,000 Series A, (original accretion rate 6.87%), 08/15/09 .......................... 1,673,669
4,620,000 Series A, (original accretion rate 6.85%), 08/15/10 .......................... 1,555,923
6,825,000 Series A, (original accretion rate 6.95%), 08/15/13 .......................... 1,846,026
6,860,000 Series A, (original accretion rate 6.95%), 08/15/14 .......................... 1,733,796
7,005,000 Series A, (original accretion rate 7.00%), 08/15/16 .......................... 1,529,262
7,115,000 Series A, (original accretion rate 7.00%), 08/15/17 .......................... 1,450,677
6,000,000 Harrison Community Schools, AMBAC Insured, (original accretion rate 6.90%),
05/01/20 ........................................................................ 1,115,580
Howell Public School, Refunding,
1,500,000 AMBAC Insured, (original accretion rate 5.75%), 05/01/12 ..................... 473,880
1,120,000 AMBAC Insured, (original accretion rate 5.75%), 05/01/13 ..................... 332,483
2,000,000 AMBAC Insured, (original accretion rate 5.75%), 05/01/14 ..................... 556,940
2,770,000 AMBAC Insured, (original accretion rate 5.75%), 05/01/15 ..................... 723,552
2,500,000 AMBAC Insured, (original accretion rate 5.75%), 05/01/16 ..................... 612,575
2,250,000 Louisiana Housing Financial Agency Mortgage Revenue, Refunding, (original accretion
rate 9.20%), 09/01/13 ........................................................... 2,160,180
Metropolitan Pier & Exposition Authority Dedicated State Tax Revenue,
5,650,000 Expansion, Project A, FGIC Insured, (original accretion rate 6.500%), 06/15/07 4,738,768
8,500,000 Expansion, Project A, FGIC Insured, (original accretion rate 6.526%), 06/15/08 3,518,745
11,000,000 Expansion, Project A, FGIC Insured, (original accretion rate 6.677%), 06/15/09 4,240,280
8,000,000 Expansion, Project A, FGIC Insured, (original accretion rate 6.628%), 06/15/10 2,872,800
9,690,000 Expansion, Project A, FGIC Insured, (original accretion rate 6.629%), 06/15/11 3,238,398
11,800,000 Expansion, Project A, FGIC Insured, (original accretion rate 3.193%), 06/15/12 7,090,266
5,250,000 Owensboro Electric Light & Power Revenue, Series B, AMBAC Insured, (original
accretion rate 6.85%), 01/01/08 ................................................. 2,280,968
Shreveport Water & Sewer Revenue,
490,000 Series B, FGIC Insured, (original accretion rate 7.05%), 12/01/07 ............ 210,636
2,530,000 Series B, FGIC Insured, (original accretion rate 7.05%), 12/01/08 ............ 1,006,358
4,080,000 Series B, FGIC Insured, (original accretion rate 7.05%), 12/01/09 ............ 1,488,098
5,630,000 Series B, FGIC Insured, (original accretion rate 7.05%), 12/01/10 ............ 1,908,062
7,000,000 Spring ISD, Refunding, FGIC Insured, Pre-Refunded, (original accretion rate 7.80%),
08/15/08 ........................................................................ 2,801,330
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
fZERO COUPON BONDS (CONT.)
$14,250,000 University of Illinois, University Revenues, AMBAC Insured, (original
accretion rate 7.187%), 04/01/10 ................................................. $ 5,184,435
Virginia State HDA, Commonwealth Mortgage,
6,700,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 01/01/11 ..... 1,860,054
6,700,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 07/01/11 ..... 1,789,838
7,100,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 01/01/12 ..... 1,825,055
7,100,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 07/01/12 ..... 1,756,114
7,400,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 01/01/13 ..... 1,761,200
7,400,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 07/01/13 ..... 1,694,674
5,650,000 Series 1990-A, Sub-Series A-4, (original accretion rate 7.85%), 07/01/14 ..... 1,198,026
11,000,000 Washington State Public Power Supply System Revenue, Nuclear Project No. 2,
Refunding, Series A, (original accretion rate 7.33%), 07/01/13 ................... 3,011,140
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Refunding,
6,400,000 Series 1990-B, (original accretion rate 6.751%), 07/01/12 .................... 1,891,071
15,000,000 Series 1990-B, (original accretion rate 7.25%), 07/01/14 ..................... 3,837,600
--------------
TOTAL ZERO COUPON BONDS (COST $91,864,416) ................................... 94,573,861
--------------
TOTAL LONG TERM INVESTMENTS (COST $6,387,714,380) ............................ 6,669,896,842
--------------
SHORT TERM INVESTMENTS .2%
580,000 Bloomington Port Authority, Minnesota, Tax Increment Revenue, Stadium Site
Redevelopment Project, ETM 02/01/95, 8.00%, 02/01/95 ............................. 598,321
380,000 Brazos River Authority, Texas, Johnson County, Surface Water & Treatment Revenue,
8.20%, 09/01/94 384,963 .........................................................
3,700,000 eCollier County, Florida, Health Facilities Authority, Health Facilities
Revenue, Moorings, Inc. Project, Weekly VRDN and Put, 3.20%, 12/01/19 ............ 3,700,000
200,000 eColorado Health Facilities Authority Revenue, Boulder Community Hospital Project,
Series B, MBIA Insured, Weekly VRDN and Put, 3.15%, 10/01/14 ..................... 200,000
450,000 Dakota County, Minnesota Housing & Redevelopment Authority, Limited Annual
Appropriation Tax & Revenue Supported, Development Housing Facilities Project,
7.00%, 01/01/95 .................................................................. 452,732
1,500,000 eIrving Ranch, California, Water District, Refunding, Series B, Daily VRDN and Put,
2.90%, 08/01/09 .................................................................. 1,500,000
1,700,000 eOrange County, California, COP, Series C, FGIC Insured, Daily VRDN and Put, 2.95%,
08/01/17.......................................................................... 1,700,000
6,300,000 eUtah State Board Regents Students Loan Revenue, Series B, AMBAC Insured, Weekly
VRDN and Put, 3.15%, 11/01/00 .................................................... 6,300,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $14,806,200) .............................. 14,836,016
--------------
TOTAL INVESTMENTS (COST $6,402,520,580) 98.2% ........................... 6,684,732,858
OTHER ASSETS AND LIABILITIES, NET 1.8% .................................. 119,528,982
--------------
NET ASSETS 100.0% ....................................................... $6,804,261,840
==============
At April 30, 1994, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,402,553,829 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost .................................................. $ 386,599,148
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value (104,420,119)
--------------
Net unrealized appreciation ..................................................... $ 282,179,029
==============
</TABLE>
The accompanying notes are an integral part of theses financial statements.
47
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1994 (CONT.)
- -----------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Guaranty Insurance Co.
BMTF - Bi-Modal Multi-Term Format
CDA - Community Development Authority/Agency
CFD - Community Facilities Development
CGIC - Capital Guaranty Insurance Co.
CHM - Collateralized Home Mortgage
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority/Agency
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority
FI/GML - Federally Insured or Guaranteed Mortgage Loan
FSA - Financial Security Assistance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority
HFA - Housing Finance Agency
HFAR - Housing Finance Agency Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority Revenue
IDB - Industrial Development Board
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MUD - Municipal Utility District
PBA - Public Building Authority
PCF - Pollution Control Financing
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RDAR - Redevelopment Agency Revenue
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
USD - Unified School District
aNon-income producing.
bSee Note 7 regarding defaulted securities.
cSecurity value estimated by Board of Directors. See Note 1.
dSee Note 1 regarding securities purchased on a when-issued basis.
eVariable rate demand notes (VRDN's) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).
fZero coupon bonds. The current effective yield may vary. The original
accretion rate by security, as reported, will remain constant.
The accompanying notes are an integral part of theses financial statements.
48
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
<S> <C>
Assets:
Investments in securities, at value
(at identified cost $6,402,520,580) $6,684,732,858
Cash 1,191,371
Receivables:
Interest 142,194,600
Investment securities sold 91,898,603
Capital shares sold 9,592,197
--------------
Total assets 6,929,609,629
--------------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery 43,364,350
When-issued basis (Note 1) 73,854,006
Capital shares repurchased 5,101,374
Management fees 2,572,364
Shareholder servicing costs 83,720
Accrued expenses and other liabilities 371,975
--------------
Total liabilities 125,347,789
--------------
Net assets, at value $6,804,261,840
==============
Net assets consist of:
Undistributed net investment income $ 15,294,390
Unrealized appreciation on investments 282,212,278
Accumulated net realized loss (84,805,229)
Capital shares 6,591,560,401
--------------
Net assets, at value $6,804,261,840
==============
Representative computation of net asset
value and offering price per share:
Net asset value and redemption
price per share
($6,804,261,840 / 576,341,902
shares outstanding) $11.81
==============
Maximum offering price
(100/96 of $11.81)+ $12.30
==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1994
<S> <C> <C>
Investment income:
Interest (Note 1) $ 463,095,773
Expenses:
Management fees (Note 5) $31,132,949
Shareholder servicing costs
(Note 5) 1,021,652
Reports to shareholders 1,382,199
Custodian fees 739,159
Professional fees 110,422
Directors' fees and expenses 156,474
Other 758,158
-----------
Total expenses 35,301,013
--------------
Net investment
income 427,794,760
--------------
Realized and unrealized loss on
investments:
Net realized loss (10,591,976)
Net unrealized depreciation
during the year (239,927,185)
--------------
Net realized and unrealized
loss on investments (250,519,161)
--------------
Net increase in net assets
resulting from operations $ 177,275,599
==============
</TABLE>
+Effective July 1, 1994, the sales charge has been increased to a maximum of
4.25% (100/95.75). On sales of $100,000 or more, the offering price is reduced
as stated in the section of the Prospectus entitled "How to Buy Shares of the
Fund."
The accompanying notes are an integral part of theses financial statements.
49
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
FINANCIAL STATEMENTS (CONT.)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income......................................................... $ 427,794,760 $ 388,037,167
Net realized gain (loss) from security transactions........................... (10,591,976) 10,577,998
Net unrealized appreciation (depreciation) during the year.................... (239,927,185) 267,886,898
-------------- --------------
Net increase in net assets resulting from operations...................... 177,275,599 666,502,063
Distributions to shareholders:
From undistributed net investment income (Note 8).............................. (433,853,432) (392,237,433)
Increase in net assets from capital share transactions (Note 2)................. 646,100,606 956,260,052
-------------- --------------
Net increase in net assets................................................ 389,522,773 1,230,524,682
Net assets:
Beginning of year.............................................................. 6,414,739,067 5,184,214,385
-------------- --------------
End of year (including undistributed net investment income of $15,294,390 - 1994
and $21,343,617 - 1993)........................................................ $6,804,261,840 $6,414,739,067
============== ==============
</TABLE>
The accompanying notes are an integral part of theses financial statements.
50
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is an open-end, management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION:
Tax-free bonds generally trade in the over-the-counter market rather than on a
national securities exchange. Often there are no transactions in a particular
security on any given day. In the absence of a recorded sale or reported bid
and asked prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities, and
various relationships between securities are used to determine the value of the
security. The Fund may also utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Directors. Short-term securities and
similar investments with remaining maturities of 60 days or less are valued at
amortized cost, which approximates current value.
B. MUNICIPAL BONDS OR NOTES WITH "PUTS":
The Fund has purchased municipal bonds or notes with the right to resell the
bonds or notes to the seller at an agreed upon price or yield on a specified
date or within a specified period (which will be prior to the maturity date of
the bonds or notes). Such a right to resell is commonly known as a "put."
C. INCOME TAXES:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income taxes and excise tax. Therefore, no income tax provision is
required.
D. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
E. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount and premium are
amortized as required by the Internal Revenue Code.
Distributions from undistributed net investment income, and net realized
capital gains from security transactions, to the extent they exceed available
capital loss carryovers, are generally made during each year, as required, to
avoid the 4% excise tax imposed on regulated investment companies by the
Internal Revenue Code.
Net investment income differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities - see Note 7.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to losses deferred for wash sale transactions.
F. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS: The Fund may trade securities
on a when-issued or delayed delivery basis, with payment and delivery scheduled
for a future date. These transactions are subject to market fluctuations and
are subject to the risk that the value at delivery may be more or less than the
trade date purchase price transactions. Although the Fund will generally
purchase these securities with the intention of acquiring such securities, it
may sell such securities before the settlement date. The Fund has set aside
sufficient investment securities as collateral for these purchase commitments.
These securities are identified on the accompanying Statement of Investments in
Securities and Net Assets.
G. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS:
Effective April 30, 1994, the Fund adopted AICPA Statement of Position 93-2:
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result, components of net assets have been reclassified to better reconcile
financial statement amounts with distributions determined in accordance with
Statement of Position 93-2.
51
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
2. CAPITAL STOCK
At April 30, 1994, there were 10,000,000,000 shares of no par value capital
stock authorized and capital paid-in aggregated $6,591,560,401. Transactions in
the Fund's shares for the years ended April 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------
1994 1993
----------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold....................................... (83,195,814 $1,025,620,699 (93,757,955 $1,123,886,446
Shares issued in reinvestment of distributions.... 11,697,850 143,535,367 10,644,281 126,931,857
Shares redeemed................................... (39,809,631) (488,804,178) (32,120,216) (385,304,975)
Changes from exercise of exchange privilege:
Shares sold...................................... 31,586,425 386,989,974 29,804,275 356,637,880
Shares redeemed.................................. (34,268,195) (421,241,256) (22,110,420) (265,891,156)
----------- ------------- ----------- -------------
Net increase...................................... 52,402,263 $ 646,100,606 79,975,875 $ 956,260,052
=========== ============= =========== =============
</TABLE>
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At April 30, 1994, for tax purposes, the Fund had capital loss carryovers as
follows:
<TABLE>
<S> <C>
Expiring in: 1996........................... $32,151,648
1997........................... 19,946,075
1998........................... 14,050,263
2000........................... 8,032,018
2002........................... 10,591,976
-----------
$84,771,980
===========
</TABLE>
For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at
April 30, 1994 by $33,249.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended April 30, 1994 aggregated $2,237,436,504 and
$1,665,594,278, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees computed monthly on the net assets of the Fund on the
last day of the month at an annualized rate of 5/8 of 1% of the first $100
million of net assets, 1/2 of 1% of net assets in excess of $100 million up to
and including $250 million, 45/100 of 1% of net assets in excess of $250
million up to and including $10 billion, 44/100 of 1% of net assets in excess
of $10 billion up to and including $12.5 billion, 42/100 of 1% of net assets in
excess of $12.5 billion up to and including $15 billion, 40/100 of 1% of net
assets in excess of $15 billion up to and including $17.5 billion, 38/100 of 1%
of net assets in excess of $17.5 billion up to and including $20 billion, and
36/100 of 1% of net assets in excess of $20 billion. Fees incurred by the Fund
aggregated $31,132,949 for the period ended April 30, 1994. The terms of the
management agreement provide that aggregate annual expenses of the Fund be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations and administrative interpretations of the states in which the
Fund's shares are registered. There was no reimbursement to the Fund under this
provision for the year ended April 30, 1994.
In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. received commissions on sales of the
Fund's capital stock for the year ended April 30, 1994 totaling $37,920,217 of
which $35,401,995 was subsequently paid to other dealers. Commissions are
deducted from the gross proceeds received from the sale of the capital stock of
the Fund, and as such are not expenses of the Fund.
Under the terms of a shareholder servicing agreement with Franklin/Templeton
Investors Services, Inc., the Fund pays costs on a per shareholder account
basis. Shareholder servicing costs incurred for the year ended April 30, 1994
aggregated $1,021,652 of which $923,341 was paid to Franklin/Templeton
Investors Services, Inc.
Certain officers and directors of the Fund are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc. and
Franklin/Templeton Investors Services, Inc., all wholly owned subsidiaries of
Franklin Resources, Inc.
52
<PAGE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. SUBSEQUENT EVENT
On April 19, 1994 and May 17 1994 the Board of Directors declared distributions
of $.065 per share from undistributed net investment income to shareholders of
record at the end of business on April 29, 1994 and May 31, 1994 payable on May
13, 1994 and June 15, 1994, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
Although the Fund has a diversified portfolio, it has investments in excess of
10% of its total net assets in the state of New York. Such concentration may
subject the Fund more significantly to economic changes occurring within that
state.
The Fund has 1.57% of its portfolio invested in lower rated and comparable
quality unrated high yield securities. Investments in higher yield securities
are accompanied by a greater degree of credit risk and such lower quality
securities tend to be more sensitive to economic conditions than higher rated
securities.
The risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities, because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. At April
30, 1994, the Fund held one defaulted security with a value aggregating
$4,350,000 representing 0.06% of the Fund's net assets. For more information as
to the specific security, see the accompanying Statement of Investments in
Securities and Net Assets.
For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due
to unpaid interest income on defaulted bonds for the current reporting period.
8. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period are set forth in the Prospectus under the caption "Financial
Highlights."
- -------------------------------------------------------------------------------
During this fiscal year, the Fund paid distributions from undistributed net
investment income in the amounts shown in the Statement of Changes in Net
Assets. The Fund hereby designates the total amount of these distributions as
exempt-interest dividends under Section 852(b)(5) of the Internal Revenue Code.
- -------------------------------------------------------------------------------
53
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