As filed with the Securities and Exchange Commission on August 23, 1996.
File Nos.
2-75925
811-3395
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 19
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20
FRANKLIN FEDERAL TAX-FREE INCOME FUND
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ]immediately upon filing pursuant to paragraph (b)
[X]on September 1, 1996 pursuant to paragraph (b)
[ ]60 days after filing pursuant to paragraph (a)(i)
[ ]on (date) pursuant to paragraph (a)(i)
[ ]75 days after filing pursuant to paragraph (a)(ii)
[ ]on (date), pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ]This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuers most recent fiscal year was filed on June 28, 1996.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
CROSS REFERENCE SHEET
FORM N-1A
N-1A Location in
Item No. Item Registration Statement
Part A: Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description "How Is the Fund Organized?"; "How
Does the Fund Invest Its Assets?";
"What Are the Fund's Potential
Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?"; "How
Taxation Affects You and the Fund?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
Part B: Information Required in
Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Contents
General Information and Not Applicable
12. History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Directors";
"Investment Advisory and Other
Services"
15. Control Persons and "Officers and Directors";
Principal Holders of
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation "How Does The Fund Purchase
Securities for Its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How Are Fund Shares
Being Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
PROSPECTUS & APPLICATION
Franklin Federal Tax-Free Income Fund
INVESTMENT STRATEGY
TAX-FREE INCOME
SEPTEMBER 1, 1996
This prospectus describes the Franklin Federal Tax-Free Income Fund (the
"Fund"). It contains information you should know before investing in the Fund.
Please keep it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 Distributors.
Franklin Federal Tax-Free Income Fund
Franklin
Federal
Tax-Free Income Fund
September 1, 1996
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............... 2
Financial Highlights.......... 3
How Does the Fund Invest Its Assets? 6
What Are the Fund's Potential Risks? 11
Who Manages the Fund?......... 11
How Does the Fund Measure Performance? 13
How Is the Fund Organized?.... 14
How Taxation Affects You and the Fund 15
About Your Account
How Do I Buy Shares?.......... 16
May I Exchange Shares for Shares of Another Fund? 21
How Do I Sell Shares?......... 24
What Distributions Might I Receive From the Fund? 26
Transaction Procedures and Special Requirements 27
Services to Help You Manage Your Account 31
Glossary
Useful Terms and Definitions.. 34
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Federal Tax-Free Income Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1996. Your actual expenses may vary.
CLASS I CLASS II
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.25% 1.00%++
Deferred Sales Charge+++ None 1.00%
Exchange Fee (per transaction) $5.00* $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.45% 0.45%
Rule 12b-1 Fees 0.06%** 0.65%**
Other Expenses 0.06% 0.06%
Total Fund Operating Expenses 0.57% 1.16%
C. Example
Assume the annual return for each class is 5% and operating expenses
are as described above. For each $1,000 investment, you would pay
the following projected expenses if you sold your shares after the number
of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $48*** $60 $73 $111
Class II $32 $46 $73 $149
For the same Class II investment, you would pay projected expenses of $22 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class I shares. See "How Do I Sell Shares?
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.10% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Fund's Annual Report to Shareholders for the fiscal
year ended April 30, 1996. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information. Class I Shares
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended April 30 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
beginning of year $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33 $10.97 $11.16 $11.64
Net investment income 0.74 0.75 0.77 0.80 0.82 0.83 0.84 0.85 0.86 0.92
Net realized & unrealized
gains (losses) on 0.104 (0.053) (0.415) 0.576 0.302 0.342 (0.238) 0.422 (0.118) (0.398)
securities
Total from investment 0.844 0.697 0.355 1.376 1.122 1.172 0.602 1.272 0.742 0.522
operations
Distributions from net
investment income (0.744) (0.777) (0.785) (0.816) (0.842) (0.852) (0.852) (0.912) (0.924) (0.980)
Distributions from realized
capital gains - - - - - - - - (0.008) (0.022)
Total Distributions (0.744) (0.777) (0.785) (0.816) (0.842) (0.852) (0.852) (0.912) (0.932) (1.002)
Net asset value at end
of year $11.83 $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33 $10.97 $11.16
Total Return* 7.33% 6.21% 2.58% 11.89% 9.90% 10.67% 5.10% 11.71% 6.72% 4.01%
Ratios/Supplemental Data
Net assets at end of
year (in 000's) $7,012,601 $6,886,941 $6,804,262 $6,414,739 $5,184,214 $4,353,043 $3,865,264 $3,648,652 $2,839,701 $2,407,298
Ratio of expenses to
average net assets 0.57% 0.59% 0.52% 0.51% 0.51% 0.50% 0.50% 0.51% 0.52% 0.54%
Ratio of net investment
income to average
net assets 6.20% 6.47% 6.27% 6.68% 7.70% 7.34% 7.39% 7.59% 7.83% 7.14%
Portfolio turnover rate 25.10% 19.88% 24.59% 13.30% 14.94% 28.79% 17.83% 16.43% 19.31% 19.70%
Class II Shares Year ended
April 30, 1996
Per Share Operating Performance
Net asset value at beginning of year $11.73+
Net investment income 0.68
Net realized and unrealized gain on securities 0.091
Total from investment operations 0.771
Distributions from net investment income (0.681)
Net asset value at end of year $11.82
Total Return* 6.68%
Ratios/Supplemental Data
Net assets at end of year (in 000's $34,110
Ratio of expenses to average net assets 1.16%
Ratio of net investment income to average net assets 5.68%
Portfolio turnover rate 25.10%
</TABLE>
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains at Net Asset Value. Before May 1, 1994, dividends
were reinvested at the maximum Offering Price, and capital gains at Net Asset
Value. Effective May 1, 1994, with the implementation of the Rule 12b-1 plan for
Class I shares, the sales charge on reinvested dividends was eliminated.
+The Fund paid a dividend to shareholders of record on the beginning of
business, May 1, 1995 in the amount of $0.062 per share. The Net Asset Value per
share at the beginning of the period includes this dividend.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund seeks to provide investors with as high a level of interest income
exempt from federal income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
The Fund seeks to achieve its objective by investing in a diversified portfolio
of municipal securities that are obligations issued by or on behalf of states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, the
interest on which is exempt from regular federal income tax.
The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB) or Fitch Investors Service, Inc. ("Fitch")(AAA, AA, A, BBB),
or in securities that are unrated if, in Advisers' opinion, the securities are
comparable in quality to those within the four highest ratings. These are
considered to be "investment grade" securities. Securities rated in the fourth
highest ratings level are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and some speculative characteristics. If the rating of an issue held
in the Fund's portfolio is lowered by the rating services, the change will be
considered by the Fund in its evaluation of the overall investment merits of
that security, but the change will not necessarily result in an automatic sale
of the security. A description of the ratings is contained in the Appendix in
the SAI.
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 with
maturities that, in the judgment of the Fund and Advisers, will provide a high
level of current income consistent with prudent investment, with consideration
given to market conditions. Under current market conditions, the average
maturity in the Fund's portfolio is 20-25 years. Generally, long-term bonds are
more sensitive to interest rate fluctuations than short-term bonds.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with the Fund's investment
objective and policies, and thereafter when determining the issuer's comparative
credit rating. When making these determinations, Advisers may (i) interview
representatives of the issuer at its offices, (ii) tour and inspect the physical
facilities of the issuer to evaluate the issuer and its operations, (iii)
perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
As a fundamental investment policy, with respect to 75% of the Fund's total
assets, the Fund may not buy securities of any issuer which would result in more
than 5% of the value of its total assets being invested in securities of any one
issuer. 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 total assets, the Fund may invest in the securities
of as few as one issuer. In determining the issuer of a tax-exempt security,
each state, each political subdivision, agency and instrumentality of a state,
and each multi-state agency of which the state is a member is a separate issuer.
Where securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, the entity is considered the issuer.
If, however, the creating government or other entity guarantees a security, the
guarantee would be considered a separate security and would be treated as an
issue of the government or other entity. Up to 25% of the Fund's assets may be
invested in tax-exempt industrial development revenue bonds or in securities of
issuers located in the same state.
As a fundamental policy, at least 80% of the Fund's total assets will be
invested in municipal securities the interest income of which is exempt from
regular federal income taxes and, under normal circumstances, the federal
alternative minimum tax. For temporary defensive purposes only, when Advisers
believes that market conditions, such as rising interest rates or other adverse
factors, would cause serious erosion to the portfolio's value, the Fund may
invest more than 20% of its assets (which could be up to 100%) in fixed-income
obligations, the interest on which is subject to regular federal income tax
and/or the federal alternative minimum tax. Any temporary taxable investments
will be limited to obligations issued or guaranteed by the full faith and credit
of the U.S. government or commercial paper rated A-1 by S&P, P-1 by Moody's, or
F-1+ by Fitch.
Types of Securities the Fund May Invest In
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession of the U.S. and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time the security is
issued.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
It is possible that the Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In these circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project, shortages or price increases of needed materials, or declining
markets or needs for the projects) might also affect other bonds in the same
segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors including
the general condition of the financial and municipal securities markets, the
size of a particular offering, the maturity of the obligation, and the credit
rating of the issuer. Generally, municipal securities with longer maturities
produce higher current yields than municipal securities with shorter maturities.
Prices of longer term securities, however, typically fluctuate more than those
of short-term securities due to changes in interest rates, tax laws and other
general market conditions. Lower-rated municipal securities generally produce a
higher yield than higher-rated municipal securities due to the perception of a
greater degree of risk as to the ability of the issuer to make timely payment of
principal and interest on its obligations.
Floating and Variable Rate Obligations. The Fund may buy variable and floating
rate demand notes ("VRDNs") which carry a demand feature that permits the Fund
to tender the obligation back to the issuer or a third party at par value plus
accrued interest before maturity, according to the terms of the obligation.
These obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices on predesignated dates. Frequently
VRDNs are secured by letters of credit or other credit support arrangements
provided by banks. Because of the demand feature, the prices of VRDNs may be
higher and the yields lower than they otherwise would be for obligations without
a demand feature. With respect to 75% of the total value of the Fund's assets,
no more than 5% of such value may be in securities underlying "puts" from the
same institution. The Fund may, however, invest up to 10% of its assets in
unconditional "puts" (exercisable even in the event of a default in the payment
of principal or interest on the underlying security) and other securities issued
by the same institution.
Private Activity Bonds. 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 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 may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax because these 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
corporate shareholders under their state franchise tax systems.
Consistent with the Fund's investment objective, the Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to the Fund. For the fiscal
year ended April 30, 1996, the Fund derived 15.22% of its income from bonds, the
interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if it is
deemed advisable. When the Fund is the buyer, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities having
an aggregate value equal to the amount of its purchase commitments until payment
is made. To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with its investment objective and policies and not
for the purpose of investment leverage.
Certificates of Participation. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs,
which are widely used by state and local governments to finance the purchase of
property, function much like installment purchase agreements. A COP is created
when long-term lease revenue obligations are issued by a governmental
corporation to pay for the acquisition of property or facilities that are then
leased to a municipality. The payments made by the municipality under the lease
are used to repay interest and principal on the obligations issued to buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that distinguishes COPs from municipal debt is that the lease which is
the subject of the transaction contains a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or in
unrated COPs believed by Advisers to be of comparable quality. Criteria
considered by the rating agencies and Advisers in assessing this risk include
the issuing municipality's credit rating, how essential the leased property is
to the municipality and the term of the lease compared to the useful life of the
leased property. The Board reviews the COPs held in the Fund's portfolio to
assure that they constitute liquid investments based on various factors reviewed
by Advisers and monitored by the Board. These factors include (a) the credit
quality of the securities and the extent to which they are rated or, if unrated,
comply with existing criteria and procedures followed to ensure that they are of
comparable quality to the ratings required for the Fund's investment, including
an assessment of the likelihood that the leases will not be canceled; (b) the
size of the municipal securities market, both in general and with respect to
COPs; and (c) the extent to which the type of COPs held by the Fund trade on the
same basis and with the same degree of dealer participation as other municipal
securities 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, 1996,
the Fund held 4.84% of the total face amount of the securities in its portfolio
in COPs and other municipal leases.
Callable Bonds. The Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds before
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have
call-protection (that is, a period of time when the bonds may not be called)
that usually lasts for 5 to 10 years, after which time the bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of 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 these circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of the
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 the bonds were redeemed.
Other Investment Policies of the Fund
Illiquid Investments. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Andrew Jennings, Sr. since 1990 and Thomas Kenny and Sheila
Amoroso since 1994.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings attended Villanova University in Philadelphia, has been in the
securities industry for over 33 years and is a member of several municipal
securities industry related committees and associations. Mr. Jennings was First
Vice President and Manager of the Municipal Institutional Bond Department at
Dean
Witter Reynolds, Inc. from 1985 to 1990.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986. He received a Bachelor of Arts degree in business and
economics from the University of California at Santa Barbara and a Master of
Science degree in finance from Golden Gate University. He is a member of several
municipal securities industry related committees and associations.
Sheila Amoroso
Portfolio Manager of Advisers
Ms. Amoroso joined Franklin in 1986. She holds a Bachelor of Science degree from
San Francisco State University and is a member of municipal securities industry
related committees and associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended April 30, 1996, management fees
totaling 0.45% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses of Class I and Class II shares, including fees paid to
Advisers, were 0.57% and 1.16%, respectively.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.10% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Each class may also advertise its taxable-equivalent
yield and distribution rate. Performance figures are usually calculated using
the maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund. The taxable-equivalent yield and distribution rate show the before-tax
yield or distribution rate that would have to be earned from a taxable
investment to equal the yield or distribution rate of the class, assuming one or
more tax rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Fund Organized?
The Fund is a diversified open-end management investment company, commonly
called a mutual fund. It was organized as a California corporation in 1982, and
is registered with the SEC under the 1940 Act. The Fund began offering two
classes of shares on May 1, 1995: Franklin Federal Tax-Free Income Fund - Class
I and Franklin Federal Tax-Free Income Fund - Class II. All shares purchased
before that time are considered Class I shares. Additional classes of shares may
be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state corporation law, or (3) required to
be voted on separately by the 1940 Act.
The Fund has cumulative voting rights. This gives each shareholder a number of
votes equal to the number of shares owned times the number of Board members to
be elected. You may cast all of your votes for one candidate or distribute your
votes between two or more candidates.
The Fund does not intend to hold annual shareholder meetings. It may hold a
special meeting, however, for matters requiring shareholder approval under the
1940 Act. A meeting may also be called by the Board in its discretion or by
shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund continues to qualify to
pay exempt-interest dividends to its shareholders. 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 you have elected to receive them in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you 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 you have 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 you may
realize a gain or loss.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includable in the tax base for determining the
extent to which your social security or railroad retirement benefits will be
subject to regular federal income tax. You are required to disclose the receipt
of tax-exempt interest dividends on your federal income tax returns.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund. For example,
distributions attributable to interest received from, or capital gain derived
from the disposition of, obligations of a given state or its political
subdivisions may be exempt from income taxes in that state.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $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 None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1 or 2
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 3:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, cust odial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts 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 the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
7. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
TempletonFunds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 5 and 6 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction Procedures
and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
By Phone
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may exceed $50,000
by completing a separate agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the shares you want to sell or
you have already returned them to the Fund
o Unless the address on your account was changed by phone within the last 30
days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
What Distributions Might I Receive From the Fund
Distribution Date
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days prior to the record date for
us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 116 and 216.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Instructions and Important Notice
Substitute W-9 Instructions 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
Identification 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.
<TABLE>
<CAPTION>
What SSN/TIN to Give. Please refer to the following guidelines:
<S> <C> <C> <C>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
Individual Individual Trust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
Joint Individual Owner who will be Corporation, Partnership, Corporation,Partnership, or
paying tax or first- or other organization other organization
named individual
Unif. Gift/ Minor Broker nominee Broker nominee
Transfer to Minor
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:
A corporation A financial institution An organization exempt from tax under
section 501(a), or an individual retirement plan
A registered dealer in securities or commodities registered in the U.S. or a
U.S. possession
A real estate investment trust
A common trust fund operated by a bank under section 584(a)
An exempt charitable remainder trust or a non-exempt trust described in section
4947(a)(1)
An entity registered at all times under the Investment Company Act of 1940
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 certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
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.
Franklin Federal Tax-Free Income Fund
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 identification 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 certification of
foreign status.
Franklin Federal Tax-Free Income Fund
Franklin Funds Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares 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 than 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 the 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 Templeton 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.
Franklin Federal Tax-Free Income Fund
Automatic Investment Plan Application: Name(s)
- ----------------------------------------------------------------------
Please print as shown on Franklin account registration.)
- ----------------------------------------------------------------------
Address ______________________________________________________________
- ----------------------------------------------------------------------
Telephone ____________________________________________________________
Bank's Name __________________________________________________________
Branch Address _______________________________________________________
Name(s) on Bank Account ______________________________________________
Checking Account No. _________________________________________________
Please attach a voided check.
[Franklin Use Only: ABA No. __________________________________________________]
Please invest my Automatic investments for $________ per month in: Franklin Fund
Name ____________________________________________________________ Franklin Fund
Account No. _______________________________________________________
Preferred Monthly Date of Checking Account Debit: 1st bank business day on or
after the: 5th n or 20th n
Signature(s) _________________________________________ Date __________________
- --------------------------------------------------------------------
All registered owners must sign. If you have any questions, please call a
Shareholder Services representative, toll free, at 1-800/632-2301.
Automatic Investment Plan Revision -
Complete only if you are revising existing Automatic Investment Plan: (and
complete section above)
Bank Change _____________________________ Amount Change $_____________________
(Attach new voided check) (Indicate new amount)
Other _________________________________________________________________________
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.
Franklin Federal Tax-Free Income Fund
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. ("Investor 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
Franklin Templeton (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 Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
Signature(s) of all registered owners and date
Printed name (and title/capacity, if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor 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 Investor 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 Investor
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 Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
Franklin Federal Tax-Free Income Fund
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
Investor 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
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
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 Investor 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 Investor 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
Investor 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 Templeton Trust Company retirement accounts.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc.
Attn: D/P REVISIONS Dept.
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
Franklin Templeton Group of Funds
Literature Request ~ Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
Global Growth
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Global Infrastructure Fund
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
Global Growth and Income
Franklin Global Utilities Fund
Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
Global Income
Franklin Global Government Income Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Templeton Americas Government Securities Fund
Growth
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Asset Allocation Fund
Franklin Balance Sheet Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Templeton American Trust, Inc.
Income
Franklin Adjustable Rate Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Non-U.S. Investors:
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
For Corporations:
Franklin Corporate Qualified
Dividend Fund
Franklin Funds Seeking
Tax-Free Income
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
Franklin State-Specific Funds Seeking Tax-Free Income
Alabama Arizona*
Arkansas**
California*
Colorado Connecticut Florida*
Georgia Hawaii**
Indiana Kentucky Louisiana Maryland Massachusetts***
Michigan*
Minnesota***
Missouri New Jersey New York*
North Carolina Ohio***
Oregon Pennsylvania Tennessee**
Texas
Virginia Washington**
Variable Annuities
Franklin ValuemarkSM
Franklin Templeton Valuemark Income Plus (an immediate annuity) *Two or more
fund options available: long-term portfolio, intermediate-term portfolio, a
portfolio of insured municipal securities, and/or a high yield portfolio (CA)
and a money market portfolio (CA and NY).
**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.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
What Are the Fund's Potential Risks?.........................
Investment Restrictions......................................
Officers and Directors.......................................
Investment Advisory and Other Services.......................
How Does the Fund Buy Securities For Its Portfolio?..........
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on Distributions and Taxes............
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
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When reading this SAI, you will see certain terms in capital letters. This means
the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The Franklin Federal Tax-Free Income Fund (the "Fund") is a
diversified, open-end management investment company. The Fund's
investment objective is to provide investors with as high a level of
interest income exempt from federal income taxes as is consistent
with prudent investing, while seeking preservation of shareholders'
capital. The Fund seeks to achieve its objective by investing in
municipal securities.
The Prospectus, dated September 1, 1996, as may be amended from time
to time, contains the basic information you should know before
investing in the Fund. For a free copy, call 1-800/DIAL BEN or write
the Fund at the address shown.
This 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 you with additional information regarding the
activities and operations of the Fund, and should be read in
conjunction with the Prospectus.
- ----------------------------------------------------------------------
Mutual funds, annuities, and other investment products:
- ----------------------------------------------------------------------
are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the
U.S. government;
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
are not deposits or obligations of, or guaranteed or endorsed by
any bank;
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
are subject to investment risks, including the possible loss of
principal.
- ----------------------------------------------------------------------
How Does the Fund Invest Its Assets?
The following provides more detailed information about some of the
securities the Fund may buy and its investment policies. You should
read it together with the section in the Prospectus entitled "How
Does the Fund Invest Its Assets?"
Description of Municipal and Other Securities
Tax Anticipation Notes. These 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. These 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. These 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. These 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. This typically represents a short-term
obligation (270 days or less) issued by a municipality to meet
working capital needs.
Municipal Bonds. These bonds meet longer-term capital needs,
generally have maturities of more than one year when issued, and 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.
Tax-Exempt Industrial Development Revenue Bonds. These are bonds that
pay tax-exempt interest and are, in most cases, revenue bonds. They
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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if
any, of the real and personal property so financed as security for
payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the
Prospectus, VRDNs are tax-exempt obligations that 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) before specified dates, either from the issuer or by drawing on
a bank letter of credit, a guarantee or insurance issued with respect
to the instrument. The interest rates are adjustable at intervals
ranging from daily up to monthly, and are calculated to maintain the
market value of the VRDN at approximately its par value on the
adjustment date.
When-Issued Purchases. Municipal bonds are frequently offered on a
"when-issued" basis. When offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to buy
is made, but delivery and payment for the when-issued securities take
place at a later date. During the period between purchase and
settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund
are held in cash pending the settlement of a purchase of securities,
the Fund would earn no income. The Fund, however, intends to be fully
invested to the extent practicable and subject to its investment
policies. While when-issued securities may be sold before the
settlement date, the Fund intends to buy the securities with the
purpose of actually acquiring them, unless a sale appears desirable
for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its
Net Asset Value. The Fund believes that its Net Asset Value or income
will not be adversely affected by its 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 its commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may be sold in
"stripped" form. Stripped municipal securities represent separate
ownership of interest and principal payments on municipal obligations.
A portion of original issue discount relating to any stripped
municipal bonds (including bonds issued to finance public purpose
governmental functions) and their interest coupons may be taxable
under certain circumstances.
Zero-Coupon Securities. The Fund's investment in zero-coupon bonds
may cause the Fund to recognize income and make distributions to
shareholders before the receipt of cash payments. Zero-coupon
securities make no periodic interest payments but instead are sold at
a deep discount from their face value. The buyer receives a rate of
return determined by the gradual appreciation of the security, which
is redeemed at face value on a specified maturity date.
Because zero-coupon securities bear no interest and compound
semiannually at the rate fixed at the time of issuance, the value of
the securities is generally more volatile than other fixed-income
securities. Since zero-coupon bondholders do not receive interest
payments, zero-coupon securities fall more dramatically than bonds
paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in
value because the bonds reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements, the
Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from
other sources such as the sale of Fund shares.
Convertible and Step Coupon Bonds. The Fund may invest a portion of
its assets in convertible and step coupon bonds. The convertible
bonds that the Fund may buy are zero-coupon securities until a
predetermined date, at which time they convert to a specified coupon
security. The coupon on step coupon bonds changes periodically during
the life of the security based on predetermined dates chosen at the
time of issuance and/or the occurrence in the future of a specified
event, such as a change in rating by a rating agency.
Callable Bonds. There are municipal bonds issued with provisions that
prevent them from being called, typically for periods of 5 to 10
years. During times of generally declining interest rates, if the
call-protection on callable bonds expires, there is an increased
likelihood that a number of such bonds may, in fact, be called away
by the issuers. Based on a number of factors, including certain
portfolio management strategies used by Advisers, the Fund believes
it has reduced the risk of adverse impact on its Net Asset Value
based on calls of callable bonds. Advisers may dispose of these bonds
in the years before their call date, if it believes the bonds are at
their maximum premium potential. In pricing these bonds in the Fund's
portfolio, each callable bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's
callable bonds may have an impact on the Fund's Net Asset Value. In
light of the Fund's pricing policies and because the Fund follows
certain amortization procedures required by the IRS, the Fund is not
expected to suffer any material adverse impact related to the value
at which the Fund has carried the bonds in connection with calls of
bonds purchased at a premium. Notwithstanding these policies, the
reinvestment of the proceeds of any called bond may be in bonds that
pay a higher or lower rate of return than the called bonds and, there
is no guarantee that a call may not have a more substantial impact
than anticipated.
Escrow-Secured Bonds or Defeased Bonds. These are created when an
issuer refunds in advance of maturity (or pre-refunds) an outstanding
bond issue that 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 buy high grade, interest bearing debt
securities that 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 Moody's Investors Service
("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch Investors
Service, Inc. ("Fitch").
U.S. Government Obligations. These 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. 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 that are similar to the municipal securities
described above in which the Fund may also invest, to the extent the
investments would be consistent with the Fund's objective and
policies.
Timing of Securities Transactions
The Fund may buy 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. While
short-term trading increases portfolio turnover, the execution costs
for municipal bonds are substantially less than those for equivalent
dollar values of equity securities.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental
policies. These restrictions may not be changed without the approval
of a majority of the outstanding voting securities of the Fund. Under
the 1940 Act, this means the approval of (i) more than 50% of the
outstanding shares of the Fund or (ii) 67% or more of the shares of
the Fund present at a shareholder meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings for temporary or emergency purposes may be made in an
amount up to 5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of
a portion of an issue of publicly distributed bonds, debentures,
notes or other debt securities, or to the extent the entry into a
repurchase agreement may be deemed a loan. Although such loans are
not presently intended, this prohibition will not preclude the Fund
from loaning securities to broker-dealers or other institutional
investors if at least 102% cash collateral is pledged and maintained
by the borrower provided such security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the
Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except
insofar as the Fund may be technically deemed an underwriter under
the federal securities laws in connection with the disposition of
portfolio securities.
5. Purchase the securities of any issuer which would result in
owning more than 10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm
of which any officer or director is a member, as principal, any
securities, but may deal with such persons or firms as brokers and
pay a customary brokerage commission; retain securities of any issuer
if, to the knowledge of the Fund, one or more of its officers,
directors or investment adviser, own beneficially more than 1/2 of 1%
of the securities of such issuer and all such officers and directors
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, "puts," "calls,"
"straddles," "spreads" or any combination thereof, or interests in
oil, gas or other mineral exploration or development programs. The
Fund may, however, write covered call options listed for trading on a
national securities exchange and purchase call options to the extent
necessary to cancel call options previously written. At present there
are no options listed for trading on a national securities exchange
covering the types of securities which are appropriate for investment
by the Fund and, therefore, there are no option transactions
available for the Fund. In addition, pursuant to the regulations
under the Corporate Securities Laws of the State of California, the
Fund would have to limit its writing of call options to 25% of its
net assets, unless it received an exemption from the Commissioner of
Corporations, should such option transactions become available.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization; except to the extent the Fund invests its uninvested
daily cash balances in shares of Franklin Tax-Exempt Money Fund and
other tax-exempt money market funds in the Franklin Group of Funds
provided i) its purchases and redemptions of such money market fund
shares may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees, nor
to any charge related to the expense of distributing the Fund's
shares (as determined under Rule 12b-1, as amended under the federal
securities laws) and iii) provided aggregate investments by the Fund
in any such money market fund do not exceed (A) the greater of (i) 5%
of the Fund's total net assets or (ii) $2.5 million, or (B) more than
3% of the outstanding shares of any such money market fund.
11. Invest more than 25% of assets in securities of any industry. For
purposes of this limitation, tax-exempt securities issued by
governments or political subdivisions of governments are not
considered to be part of any industry.
In response to state requirements:
(1) the Fund will not invest in real estate limited partnerships or
in interests (other than publicly traded equity securities) in oil,
gas, or other mineral leases, exploration or development;
(2) the Fund may not invest in warrants (valued at the lower of cost
or market) in excess of 5.0% of the value of the Fund's net assets.
No more than 2.0% of the value of the Fund's net assets may be
invested in warrants (valued at the lower of cost or market) which
are not listed on the New York or American Stock Exchanges. Warrants
acquired by the Fund in units or attached to securities may be deemed
to be without value.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in value of
portfolio securities or the amount of assets will not be considered a
violation of any of the foregoing restrictions.
Officers and Directors
The Board has the responsibility for the overall management of the
Fund, including general supervision and review of its investment
activities. The Board, in turn, elects the officers of the Fund who
are responsible for administering the Fund's day-to-day operations.
The affiliations of the officers and Board members and their
principal occupations for the past five years are shown below.
Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Principal Occupation
Name, Age and Address Offices with During the Past Five
the Fund Years
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Director
President and Director, Abbott Corporation (an investment company);
and director, trustee or managing general partner, as the case may
be, of 31 of the investment companies in the Franklin Group of Funds.
Harris J. Ashton (64)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Director
President, Chief Executive Officer and Chairman of the Board, General
Host Corporation (nursery and craft centers); Director, RBC Holdings,
Inc. (a bank holding company) and Bar-S Foods; and director, trustee
or managing general partner, as the case may be, of 55 of the
investment companies in the Franklin Templeton Group of Funds.
*Harmon E. Burns (51)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
Executive Vice President, Secretary and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of
60 of the investment companies in the Franklin Templeton Group of
Funds.
S. Joseph Fortunato (64)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of
General Host Corporation; director, trustee or managing general
partner, as the case may be, of 57 of the investment companies in the
Franklin Templeton Group of Funds.
David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105
Director
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may be, of
30 of the investment companies in the Franklin Group of Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Director
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and General Host Corporation; and officer and/or director,
trustee or managing general partner, as the case may be, of most
other subsidiaries of Franklin Resources, Inc. and of 56 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
Executive Vice President and Director, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; President and Director,
Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Director
General Partner, Peregrine Associates and Miller & LaHaye, which are
General Partners of Peregrine Ventures and Peregrine Ventures II
(venture capital firms); Chairman of the Board and Director,
Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director, trustee or managing general partner, as
the case may be, of 26 of the investment companies in the Franklin
Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Director
Chairman, White River Corporation (information services); Director,
Fund American Enterprises Holdings, Inc., MCI Communications, Inc.,
MedImmune, Inc. (biotechnology), InfoVest Corporation (information
services), Fusion Systems Corporation (industrial technology), and
Source One Mortgage Services Corporation (information services); and
director, trustee or managing general partner, as the case may be, of
52 of the investment companies in the Franklin Templeton Group of
Funds; and formerly held the following positions: Chairman, Hambrecht
and Quist Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers,
Inc., and Franklin Templeton Distributors, Inc.; officer and/or
director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing general partner, as the
case may be, of 37 of the investment companies in the Franklin Group
of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; officer of
most other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.;
Senior Vice President, Franklin Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and officer of 60 of the
investment companies in the Franklin Templeton Group of Funds.
Andrew Jennings, Sr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Vice President, Franklin Advisers, Inc.; employee of Franklin
Resources, Inc. and its subsidiaries in a portfolio management
capacity since 1990; from 1985 to 1990, first vice president and
manager of the municipal institutional bond department at Dean Witter
Reynolds, Inc., and officer of one investment company in the Franklin
Group of Funds.
Thomas J. Kenny (33)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of eight
of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 32 of the investment companies in
the Franklin Group of Funds.
R. Martin Wiskemann (69)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin
Advisers, Inc.; Senior Vice President, Franklin Management, Inc.;
Vice President, 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 21 of the investment
companies in the Franklin Group of Funds.
The table above shows the officers and Board members who are
affiliated with Distributors and Advisers. Nonaffiliated members of
the Board are currently paid $950 per month plus $950 per meeting
attended. As shown above, some of the nonaffiliated Board members
also serve as directors, trustees or managing general partners of
other investment companies in the Franklin Templeton Group of Funds.
They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board
members by the Fund and by other funds in the Franklin Templeton
Group of Funds.
<TABLE>
<CAPTION>
Number of Boards in
the Franklin
Total Fees Received Templeton Group of
from the Franklin Funds on Which Each
Total Fees Received Templeton Group of Serves***
from the Fund * Funds**
Name
<S> <C> <C> <C>
Frank H. Abbott, III $22,800 $162,420 31
Harris J. Ashton $22,800 $327,925 55
S. Joseph Fortunato $22,800 $344,745 57
David W. Garbellano $22,800 $146,100 30
Frank W.T. LaHaye $21,850 $143,200 26
Gordon S. Macklin $22,800 $321,525 52
</TABLE>
*For the fiscal year ended April 30, 1996.
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered
investment companies in the Franklin Templeton Group of Funds. This
number does not include the total number of series or funds within
each investment company for which the Board members are responsible.
The Franklin Templeton Group of Funds currently includes 60
registered investment companies, with approximately 166 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata
by each fund in the Franklin Templeton Group of Funds for which they
serve as director, trustee or managing general partner. No officer or
Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or
Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of August 6, 1996, the officers and Board members, as a group,
owned of record and beneficially approximately 334 shares, or less
than 1% of the Fund's total outstanding shares. Many of the Board
members also own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
Investment Advisory and Other Services
Investment Manager and Services Provided. The Fund's investment
manager is Advisers. Advisers provides investment research and
portfolio management services, including the selection of securities
for the Fund to buy, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed.
Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers'
activities are subject to the review and supervision of the Board to
whom Advisers renders periodic reports of the Fund's investment
activities.
Advisers provides office space and furnishings, facilities and
equipment required for managing the business affairs of the Fund.
Advisers also maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. Advisers is covered
by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S.
registered investment companies with 124 separate series. Advisers
may give advice and take action with respect to any of the other
funds it manages, or for its own account, that may differ from action
taken by Advisers on behalf of the Fund. Similarly, with respect to
the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or
sell for its or their own account or for the accounts of any other
fund. Advisers is not obligated to refrain from investing in
securities held by the Fund or other funds that it manages or
administers. Of course, any transactions for the accounts of Advisers
and other access persons will be made in compliance with the Fund's
Code of Ethics.
Management Fees. Under its management agreement, the Fund pays
Advisers a management fee equal to a monthly rate of 5/96 of 1%
(approximately 5/8 of 1% per year) for the first $100 million of net
assets of the Fund; 1/24 of 1% (approximately 1/2 of 1% per year) on
net assets of the Fund in excess of $100 million up to $250 million;
9/240 of 1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million up to $10 billion; 11/300 of 1%
(approximately 44/100 of 1% per year) of net assets of the Fund in
excess of $10 billion up to $12.5 billion; 7/200 of 1% (approximately
42/100 of 1% per year) of net assets of the Fund in excess of $12.5
billion up to $15 billion; 1/30 of 1% (approximately 40/100 of 1% per
year) of net assets of the Fund in excess of $15 billion up to $17.5
billion; 19/600 of 1% (approximately 38/100 of 1% per year) of net
assets of the Fund in excess of $17.5 billion up to $20 billion; and
3/100 of 1% (approximately 36/100 of 1% per year) of net assets of
the Fund in excess of $20 billion. The fee is computed at the close
of business on the last business day of each month. Each class will
pay its proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the
most stringent limits on Fund expenses of any state where the Fund
offers its shares. Currently, the most restrictive limitation on a
fund's allowable expenses for each fiscal year, as a percentage of
its average net assets, is 2.5% of the first $30 million in assets,
2% of the next $70 million, and 1.5% of assets over $100 million.
Expense reductions have not been necessary based on state
requirements.
For the fiscal years ended April 30, 1994, 1995 and 1996, management
fees totaling $31,132,949, $30,723,439 and $32,164,702, respectively,
were paid to Advisers.
Management Agreement. The management agreement is in effect until
March 31, 1997. It may continue in effect for successive annual
periods if its continuance is specifically approved at least annually
by a vote of the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for
that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, or by Advisers
on 30 days' written notice, and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned
subsidiary of Resources, is the Fund's shareholder servicing agent
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.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington
Street, New York, New York, 10286, acts as custodian of the
securities and other assets of the Fund. Bank of America NT & SA, 555
California Street, 4th Floor, San Francisco, California 94104, acts
as custodian for cash received in connection with the purchase of
Fund shares. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the
fiscal year ended April 30, 1996, their auditing services consisted
of rendering an opinion on the financial statements of the Fund
included in the Fund's Annual Report to Shareholders for the fiscal
year ended April 30, 1996.
How Does the Fund Buy Securities For Its Portfolio?
Since most purchases by the Fund are principal transactions at net
prices, the Fund incurs little or no brokerage costs. The Fund deals
directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless
it is determined that a better price or execution may be obtained by
using the services of a broker. Purchases of portfolio securities
from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund
does not buy bonds in underwritings where it is given no choice, or
only limited choice, in the designation of dealers to receive the
commission. The Fund seeks to obtain prompt execution of orders at
the most favorable net price. Transactions may be directed to dealers
in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions
or on the research services received by Advisers from dealers
effecting transactions in portfolio securities. The allocation of
transactions in order to obtain additional research services permits
Advisers to supplement its own research and analysis activities and
to receive the views and information of individuals and research
staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other
clients. If the Fund's officers are satisfied that the best execution
is obtained, the sale of Fund shares may also be considered a factor
in the selection of broker-dealers to execute the Fund's portfolio
transactions.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered
at or about the same time, transactions in these securities will be
allocated among the several investment companies and clients in a
manner deemed equitable to all by Advisers, taking into account the
respective sizes of the funds and the amount of securities to be
purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as
the Fund is concerned. In other cases it is possible that the ability
to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
During the fiscal years ended April 30, 1994, 1995 and 1996, the Fund
paid no brokerage commissions. As of April 30, 1996, the Fund did not
own securities of its regular broker-dealers.
How Do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
The Fund continuously offers its shares through Securities Dealers
who have an agreement with Distributors. Securities Dealers may at
times receive the entire sales charge. A Securities Dealer who
receives 90% or more of the sales charge may be deemed an underwriter
under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ
from federal law. Banks and financial institutions that sell shares
of the Fund may be required by state law to register as Securities
Dealers. Financial institutions or their affiliated brokers may
receive an agency transaction fee in the percentages indicated in the
table under "How Do I Buy Shares? - Purchase Price of Fund Shares" in
the Prospectus.
When you buy shares, if you submit a check or a draft that is
returned unpaid to the Fund we may impose a $10 charge against your
account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers
who participate in the trusts. A portion of these service fees may be
paid to Distributors or one of its affiliates to help defray expenses
of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan
through securities advisory firms known locally as Securities
Investment Consulting Enterprises. In conformity with local business
practices in Taiwan, Class I shares may be offered with the following
schedule of sales charges:
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors will pay the
following commissions, out of its own resources, to Securities
Dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 0.75% on sales of $1 million to $2
million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100
million. These breakpoints are reset every 12 months for purposes of
additional purchases.
Letter of Intent. You may qualify for a reduced sales charge when you
buy Class I shares, as described in the Prospectus. At any time
within 90 days after the first investment that you want to qualify
for a reduced sales charge, you may file with the Fund a signed
shareholder application with the Letter of Intent section completed.
After the Letter 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 on purchases
in more than one Franklin Templeton Fund will be effective only after
notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds, including
Class II shares, acquired more than 90 days before the Letter is
filed, will be counted towards completion of the Letter but will not
be entitled to a retroactive downward adjustment in the sales charge.
Any redemptions you make during the 13 month period will be
subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be
an upward adjustment of the sales charge, depending on the amount
actually purchased (less redemptions) during the period. If you
execute a Letter prior to a change in the sales charge structure of
the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time
the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of
the total intended purchase will be reserved in Class I shares of the
Fund registered in your name until you fulfill the Letter. If total
purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in your
name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an
amount that 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 (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, you 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 that would have applied to the aggregate
purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will
be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in
sales charge is not paid, the redemption of an appropriate number of
reserved shares to realize the difference will be made. In the event
of a total redemption of the account prior to fulfillment of the
Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
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
the "ex-dividend date"). The processing date for the reinvestment of
dividends may vary, and does not affect the amount or value of the
shares acquired.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account,
declared but unpaid income dividends and capital gain distributions
will be exchanged into the new fund and will be invested at Net Asset
Value. Backup withholding and information reporting may apply.
Information regarding the possible tax consequences of an exchange is
included in the tax section in this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short
period, sell their shares of the Fund under the exchange privilege,
the Fund might have to sell portfolio securities it might otherwise
hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in
periodic large inflows of money. If this occurs, it is the Fund's
general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the Fund's
investment objective exist immediately. This money will then be
withdrawn from the short-term tax-exempt municipal securities and
invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are
generally not available until the fifth business day following the
sale. The funds you are seeking to exchange into may delay issuing
shares pursuant to an exchange until that fifth business day. The
sale of Fund shares to complete an exchange will be effected at Net
Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for
establishing or maintaining a systematic withdrawal plan. Once your
plan is established, any distributions paid by the Fund will be
automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in
your account, generally on the first business day of the month in
which a payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or
exhaust the shares in your account if payments exceed distributions
received from the Fund. This is especially likely to occur if there
is a market decline. If a withdrawal amount exceeds the value of your
account, your account will be closed and the remaining balance in
your account will be sent to you. Because the amount withdrawn under
the plan may be more than your actual yield or income, part of the
payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying
you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the
Fund receives notification of the shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your
Securities Dealer, it is your dealer's responsibility to transmit the
order to the Fund in a timely fashion. Any loss to you resulting from
your dealer's failure to do so must be settled between you and your
Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by
check) all requests for redemption by any shareholder of record,
limited in amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of the Fund's net assets at the beginning
of the 90-day period. This commitment is irrevocable without the
prior approval of the SEC. In the case of redemption requests in
excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the
Fund, in case of an emergency, or if the payment of such a redemption
in cash would be detrimental to the existing shareholders of the
Fund. In these circumstances, the securities distributed would be
valued at the price used to compute the Fund's net assets and you may
incur brokerage fees in converting the securities to cash. The Fund
does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a
timely manner.
General Information
If dividend checks are returned to the Fund marked "unable to
forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at Net Asset Value
until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you
or verify your current mailing address, we may deduct the costs of
our efforts to find you from your account. These costs may include a
percentage of the account when a search company charges a percentage
fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or
sell shares of the Fund must be denominated in U.S. dollars. We may,
in our sole discretion, either (a) reject any order to buy or sell
shares denominated in any other currency or (b) honor the transaction
or make adjustments to your account for the transaction as of a date
and with a foreign currency exchange factor determined by the drawee
bank.
Special Services. The Franklin Templeton Institutional Services
Department provides specialized services, including recordkeeping,
for institutional investors. The cost of these services is not borne
by the Fund.
Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous
beneficial owners for recordkeeping, operations performed with
respect to such owners. For each beneficial owner in the omnibus
account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor
Services. These financial institutions may also charge a fee for
their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
How Are Fund Shares Valued?
We calculate the Net Asset Value per share of each class as of the
scheduled close of the Exchange, generally 1:00 p.m. Pacific time,
each day that the Exchange is open for trading. As of the date of
this SAI, the Fund is informed that the Exchange observes the
following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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 and dividends are recorded on the ex-dividend
date. Over-the-counter portfolio securities are valued within the
range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers. Municipal securities
generally trade in the over-the-counter market rather than on a
securities exchange. In the absence of a sale or reported bid and ask
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 municipal securities.
Generally, trading in U.S. government securities and money market
instruments is substantially completed each day at various times
before the scheduled close of the Exchange. The value of these
securities used in computing the Net Asset Value of each class is
determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they
are determined and the scheduled close of the Exchange that will not
be reflected in the computation of the Net Asset Value of each class.
If events materially affecting the values of these securities occur
during this period, the securities will be valued at their fair value
as determined in good faith by the Board.
Other securities for which market quotations are readily available
are valued at the current market price, which may be obtained from a
pricing service, based on a variety of factors including recent
trades, institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments related to
specific issues. Securities and other assets for which market prices
are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the
Board, the Fund may utilize a pricing service, bank or Securities
Dealer to perform any of the above described functions.
Additional Information on Distributions and Taxes
Distributions
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form
of interest and other income derived from its investments. This
income, less the expenses incurred in the Fund's operations, is its
net investment income from which income dividends may be distributed.
Thus, the amount of dividends paid per share may vary with each
distribution.
2. Capital gain distributions. The Fund may derive capital gains or
losses in connection with sales or other dispositions of its
portfolio securities. Distributions by the Fund derived from net
short-term and net long-term capital gains (after taking into account
any capital loss carryforward or post-October loss deferral) 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 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.
Taxes
As stated in the Prospectus, the Fund has elected to be treated as a
regulated investment company under Subchapter M of the Code. The
Board reserves the right not to maintain the qualification of the
Fund as a regulated investment company if it determines this course
of action to be beneficial to shareholders. In that 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 its 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 you until the
following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which
they are declared. The Fund intends as a matter of policy to declare
and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be
sufficient to avoid any or all federal excise taxes.
Since the Fund's income is derived from interest income and gain on
the sale of portfolio securities rather than dividend income, no
portion of the Fund's distributions will generally be eligible for
the corporate dividends-received deduction. None of the distributions
paid by the Fund for the fiscal year ended April 30, 1996, qualified
for this deduction and it is not anticipated that any of the current
year's dividends will so qualify.
Redemptions and exchanges of Fund shares are taxable transactions for
federal and state income tax purposes. For most shareholders, gain or
loss will be recognized in an amount equal to the difference between
your basis in the shares and the amount received, subject to the
rules described below. If such shares are a capital asset in your
hands, gain or loss will be capital gain or loss and will be
long-term for federal income tax purposes if the shares have been
held for more than one year.
The Fund will inform you of the source of your dividends and
distributions at the time they are paid, and will promptly after the
close of each calendar year advise you of the tax status for federal
income tax purposes of such dividends and distributions, including
the portion of the dividends on an average basis which constitutes
taxable income or a tax preference item under the federal alternative
minimum tax. If you have not held shares of the Fund for a full
calendar year, you may designate as tax-exempt or as tax preference
income a percentage of income which is not equal to the actual amount
of tax-exempt or tax preference income earned during the period of
your investment in the Fund.
Interest on indebtedness incurred (directly or indirectly) by you to
buy or carry Fund shares may not be fully deductible for federal
income tax purposes.
All or a portion of a loss realized upon a redemption of shares will
be disallowed to the extent other shares of the Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days
before or after such redemption. Any loss disallowed under these
rules will be added to the tax basis of the shares repurchased.
Any loss incurred on the sale or exchange of shares within six months
from the date of their purchase, will be treated as a long-term
capital loss to the extent of capital gain dividends received with
respect to such shares and the loss 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 buying 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 Templeton Group of Funds 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. You should consult with your tax advisor about the
tax rules applicable to the redemption or exchange of Fund shares.
Many states grant tax-free status to dividends paid to shareholders
of mutual funds from interest income earned by the Fund from direct
obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investments in
GNMA/FNMA securities and repurchase agreements collateralized by U.S.
government securities do not generally qualify for tax-free
treatment. While it is not the primary investment objective of this
Fund to invest in such obligations, the Fund is authorized to so
invest for temporary or defensive purposes. To the extent that such
investments are made, the Fund will provide you with the percentage
of any dividends paid which may qualify for such tax-free treatment
at the end of each calendar year. You should then consult with your
own tax advisor with respect to the application of your state and
local laws to these distributions and on the application of other
state and local laws on distributions and redemption proceeds
received from the Fund.
From time to time, the Fund may buy a tax-exempt obligation with
market discount; that is, for a price that is less than the principal
amount of the bond, or for a price that is less than the principal
amount of the bond where the bond was issued with original issue
discount and such market discount exceeds a de minimis amount under
the Code. For such obligations purchased after April 30, 1993, a
portion of the gain on sale or disposition (not to exceed the accrued
portion of market discount as of the time of sale or disposition) is
treated as ordinary income rather than capital gain. Any distribution
by the Fund of such ordinary income to its shareholders will be
subject to regular federal and state income taxes in the hands of
Fund shareholders. In any fiscal year, the Fund may elect not to
distribute to its shareholders its taxable ordinary income and to
pay, instead, federal income or excise taxes on this income at the
Fund level. The amount of such distributions, if any, is expected to
be small.
Persons who are defined in the Code as "substantial users" (or
related persons) of facilities financed by private activity bonds
should consult with their tax advisors before buying shares of the
Fund.
If you are not a U.S. person for purposes of federal income taxation,
you should consult with your financial or tax advisor regarding the
applicability of U.S. withholding or other taxes on distributions
received by you from the Fund and the application of foreign tax laws
to these distributions.
The Fund's Underwriter
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the
Fund's shares. The underwriting agreement will continue in effect for
successive annual periods if its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders
of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not
parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a
meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares,
including advertising expenses and the costs of printing sales
material and prospectuses used to offer shares to the public. The
Fund pays the expenses of preparing and printing amendments to its
registration statements and prospectuses (other than those
necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were
reinvested at the Offering Price 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, this reinvestment is at Net Asset Value.
In connection with the offering of the Fund's shares, aggregate
underwriting commissions for the fiscal years ended April 30, 1994,
1995, and 1996, were $37,920,217, $18,753,666 and 17,594,884,
respectively. After allowances to dealers, Distributors retained
$2,518,222, $976,816 and 1,143,252 in net underwriting discounts and
commissions for the respective years. Distributors received $11,378
in connection with redemptions or repurchases of shares for the
fiscal year ended April 30, 1996. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan for each class, as discussed
below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
The Rule 12b-1 Plans
Each class has adopted a distribution plan or "Rule 12b-1 plan"
pursuant to Rule 12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Fund may pay up to a
maximum of 0.10% per year of Class I's average daily net assets,
payable quarterly, for expenses incurred in the promotion and
distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the
annual fees payable under the plan will be equal to the sum of: (i)
the amount obtained by multiplying 0.10% by the average daily net
assets represented by Class I shares of the Fund that were acquired
by investors on or after May 1, 1994, 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 Class I shares of the
Fund that were acquired before May 1, 1994 ("Old Assets"). These fees
will be paid to the current Securities Dealer of record on the
account. In addition, until such time as the maximum payment of 0.10%
is reached on a yearly basis, up to an additional 0.01% will be paid
to Distributors under the plan. The payments made to Distributors
will be used by Distributors to defray other marketing expenses that
have been incurred in accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I
shareholders, regardless of when they purchased their shares, will
bear Rule 12b-1 expenses at the same rate. The initial rate will be
at least 0.06% (0.05% plus 0.01%) of the average daily net assets of
Class I and, as Class I shares are sold on or after May 1, 1994, will
increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments
under the plan will also increase (but will not exceed 0.10% of
average daily net assets). While this is the currently anticipated
calculation for fees payable under the Class I plan, the plan permits
the Board to allow the Fund to pay a full 0.10% on all assets at any
time. The approval of the Board would be required to change the
calculation of the payments to be made under the Class I plan.
The Class II Plan. Under the Class II plan, the Fund pays
Distributors up to 0.50% per year of Class II's average daily net
assets, payable quarterly, for distribution and related expenses.
These fees may be used to compensate Distributors or others for
providing distribution and related services and bearing certain Class
II expenses. All distribution expenses over this amount will be borne
by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per
year of Class II's average daily net assets, payable quarterly, as a
servicing fee. During the first year after a purchase of Class II
shares, Distributors may keep this portion of the Rule 12b-1 fees
associated with the Class II purchase.
The Class I and Class II Plans. In addition to the payments that
Distributors or others are entitled to under each plan, each plan
also provides that, to the extent the Fund, Advisers or Distributors
or other parties on behalf of the Fund, Advisers or Distributors make
payments that are deemed to be for the financing of any activity
primarily intended to result in the sale of shares of each class
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. The
terms and provisions of each plan relating to required reports, term,
and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which
include payments made under each plan, plus any other payments deemed
to be made pursuant to a plan, exceed the amount permitted to be paid
under the rules of the National Association of Securities Dealers,
Inc.
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 plans as a
result of applicable federal law prohibiting certain banks from
engaging in the distribution of mutual fund shares. These banking
institutions, however, are permitted to receive fees under the plans
for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services,
you would be permitted to remain a shareholder of the Fund, and
alternate means for continuing the servicing would be sought. In this
event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you
would suffer any adverse financial consequences as a result of any of
these changes.
Each plan has been approved in accordance with the provisions of Rule
12b-1. The plans are renewable annually by a vote of the Board,
including a majority vote of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial
interest in the operation of the plans, cast in person at a meeting
called for that purpose. It is also required that the selection and
nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by
any act that constitutes an assignment of the management agreement
with Advisers, or by vote of a majority of the outstanding shares of
the class. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any
time upon written notice.
The plans 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 outstanding shares of the class, and
all material amendments to the plans or any related agreements shall
be approved by a vote of the non-interested members of the Board,
cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board at least
quarterly on the amounts and purpose of any payment made under the
plans and any related agreements, as well as to furnish the Board
with such other information as may reasonably be requested in order
to enable the Board to make an informed determination of whether the
plans should be continued.
For the fiscal year ended April 30, 1996, Distributors had eligible
expenditures of $5,476,623 and $393,712 for advertising, printing,
and payments to underwriters and broker-dealers pursuant to the Class
I and Class II plans, of which the Fund paid Distributors $4,772,518
and $97,914 under the Class I and Class II plans.
How Does the Fund Measure Performance?
Performance quotations are subject to SEC rules. These rules require
the use of standardized performance quotations or, alternatively,
that every non-standardized performance quotation furnished by the
Fund be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If
a Rule 12b-1 plan is adopted, performance figures reflect fees from
the date of the plan's implementation. An explanation of these and
other methods used by the Fund to compute or express performance for
each class follows. 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.
Total Return
Average Annual Total Return. Average annual total return is
determined by finding the average annual rates of return over one-,
five- and ten-year periods that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each one-,
five- and ten-year period, and the deduction of all applicable
charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and
ten-year periods ended April 30, 1996, was 2.77%, 6.77% and 7.36%.
The average annual total return for Class II for the one-year period
ended April 30, 1996, was 5.14%.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the one-, five-, or ten-year periods at the end
of the one-, five-, or ten-year periods.
Cumulative Total Return. The Fund may also quote the cumulative total
return for each class, in addition to the average annual total
return. These quotations are computed the same way, except the
cumulative total return will be based on the actual return for each
class for a specified period rather than on the average return over
one-, five- and ten-year periods. The cumulative total return for
Class I for the one-, five- and ten-year periods ended April 30,
1996, was 2.77%, 38.77% and 103.38%. The cumulative total return for
Class II for the one-year period ended April 30, 1996, was 5.14%.
Yield
Current Yield. Current yield of each class shows the income per share
earned by the Fund. It is calculated by dividing the net investment
income per share of each class earned during a 30-day base period by
the applicable maximum Offering Price per share on the last day of
the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class
during the base period. The yield for each class for the 30-day
period ended April 30, 1996, was 5.19% for Class I and 4.80% for
Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
-----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
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.
Taxable-Equivalent Yield. The Fund may also quote a
taxable-equivalent yield for each class that shows the before-tax
yield that would have to be earned from a taxable investment to
equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is
tax-exempt by one minus the highest applicable federal income tax
rate and adding the product to the portion of the class' yield
that is not tax-exempt, if any. The taxable-equivalent yield for
each class for the 30-day period ended April 30, 1996, was 8.59%%
for Class I and 7.95% for Class II.
As of the date of this SAI, the federal income tax rate upon which
the taxable-equivalent yield quotations are based was 39.6%. From
time to time, as any changes to the rate become effective,
taxable-equivalent yield quotations advertised by the Fund will be
updated to reflect these changes. The Fund expects updates may be
necessary as tax rates are changed by the federal government. The
advantage of tax-free investments, like the Fund, will be enhanced by
any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the Fund.
Current Distribution Rate
Current yield and taxable-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 shareholders of a class.
Amounts paid to shareholders are reflected in the quoted current
distribution rate or taxable-equivalent distribution rate. The
current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. 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. The current distribution
rate for each class for the 30-day period ended April 30, 1996, was
6.02% for Class I and 5.97% for Class II.
A taxable-equivalent distribution rate shows the taxable distribution
rate equivalent to the class' current distribution rate. The
advertised taxable-equivalent distribution rate will reflect the most
current federal tax rate available to the Fund. The
taxable-equivalent distribution rate for each class for the 30-day
period ended April 30, 1996, was 9.97% for Class I and 9.88% for
Class II.
Volatility
Occasionally statistics may be used to show the Fund's volatility or
risk. Measures of volatility or risk are generally used to compare
the Fund's Net Asset Value or performance to a market index. One
measure of volatility is beta. Beta is the volatility of a fund
relative to the total market, as represented by an index considered
representative of the types of securities in which the fund invests.
A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than
the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net
Asset Value or total return around an average over a specified period
of time. The idea is that greater volatility means greater risk
undertaken in achieving performance.
Other Performance Quotations
For investors who are permitted to buy Class I shares without a sales
charge, sales literature about Class I may quote a current
distribution rate, yield, cumulative total return, average annual
total return and other measures of performance as described elsewhere
in this SAI with the substitution of Net Asset Value for the public
Offering Price.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds
belonging to the Templeton Group of Funds. Resources is the parent
company of the advisors and underwriter of both the Franklin Group of
Funds and Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in the Fund may satisfy
your investment objective, advertisements and other materials about
the Fund may discuss certain measures of each class' performance as
reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported
by other investments, indices, and averages. These comparisons may
include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices -
measures yield, price, and total return for Treasury, agency,
corporate, mortgage and Yankee bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices -
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 or its component indices -
measures yield, price and total return for the municipal bond market.
e) Bond Buyer 20-Bond Index - an index of municipal bond yields based
upon yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 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, 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 - measures yield, price and total return for the Long-Term
High-Yield Index, Intermediate-Term High-Yield Index, and 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, 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 and rank individual mutual
fund performance over specified time periods, assuming reinvestment
of all distributions, exclusive of any applicable sales charges.
l) Morningstar - information published by Morningstar, Inc.,
including Morningstar proprietary mutual fund ratings. The ratings
reflect Morningstar's assessment of the historical risk adjusted
performance of a fund over specified time periods relative to other
funds within its class.
From time to time, advertisements or information for the Fund may
include a discussion of certain attributes or benefits to be derived
from an investment in the Fund. The advertisements or information may
include symbols, headlines, or other material that highlights or
summarizes the information discussed in more detail in the
communication.
Advertisements or information may also compare a class' performance
to the return on CDs or other investments. You should be aware,
however, that an investment in the Fund involves the risk of
fluctuation of principal value, a risk generally not present in an
investment in a CD issued by a bank. 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 that 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. CDs are frequently insured by an
agency of the U.S. government. An investment in the Fund is not
insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that
the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolio, the indices and
averages are generally unmanaged, and the items included in the
calculations of the averages may not be identical to the formula used
by the Fund to calculate its figures. In addition, there can be no
assurance that the Fund will continue its performance as compared to
these other averages.
Miscellaneous Information
The Fund may help you achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a
home, college costs and other long-term goals. The Franklin College
Costs Planner may help you in determining how much money must be
invested on a monthly basis in order to have a projected amount
available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning
Guide leads you through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that
these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of
the largest mutual fund organizations in the U.S., and may be
considered in a program for diversification of assets. Founded in
1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 48 years and now services more than 2.5
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 $145 billion in assets under management for more than 4.1
million U.S. based mutual fund shareholder and other accounts. The
Franklin Templeton Group of Funds offers 115 U.S. based mutual funds
to the public. The Fund may identify itself by its NASDAQ symbol or
CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages
more than 43 billion in municipal bond assets for over three quarters
of a million investors. According to Research and Ratings Review,
Franklin's municipal research team ranked number 2 out of 800
investment advisory firms surveyed by TMS Holdings, Inc. as of March
31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin
number one in service quality for five of the past eight 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 annual
amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.
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.
In the event of disputes involving multiple claims of ownership or
authority to control your account, the Fund has the right (but has no
obligation) to: (a) freeze the account and require the written
agreement of all persons deemed by the Fund to have a potential
property interest in the account, 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.
Summary of Code of Ethics. Employees of Resources or its subsidiaries
who are access persons under the 1940 Act are permitted to engage in
personal securities transactions subject to the following general
restrictions and procedures: (i) the trade must receive advance
clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations
must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions
must be provided to the compliance officer; and (iii) access persons
involved in preparing and making investment decisions must, in
addition to (i) and (ii) above, file annual reports of their
securities holdings each January and inform the compliance officer
(or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
Financial Statements
The audited financial statements contained in the Annual Report to
Shareholders of the Fund for the fiscal year ended April 30, 1996,
including the auditors' report, are incorporated herein by reference.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of the Fund
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares,
designated "Class I" and "Class II." The two classes have
proportionate interests in the Fund's portfolio. They differ,
however, primarily in their sales charge structures and Rule 12b-1
plans.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and the Franklin Government
Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned
holding company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered mutual funds
in the Franklin Group of Funds and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the
Fund's shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by
deducting the fund's liabilities from the total assets of the
portfolio. The net asset value per share is determined by dividing
the net asset value of the fund by the number of shares outstanding.
Offering Price - The public offering price is based on the Net Asset
Value per share of the class and includes the front-end sales
charge. The maximum front-end sales charge is 4.25% for Class I and
1% for Class II.
Prospectus - The prospectus for the Fund dated September 1, 1996, as
may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or
through affiliates, has an agreement with Distributors to handle
customer orders and accounts with the Fund. This reference is for
convenience only and does not indicate a legal conclusion of capacity.
Templeton Funds - The U.S. registered mutual funds in the Templeton
Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context,
these terms refer to the Fund and/or Investor Services, Distributors,
or another wholly-owned subsidiary of Resources.
APPENDIX
Description of Ratings
Municipal Bond Ratings
Moody's
Aaa: Municipal bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large,
fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks
appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment
attributes and are considered upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated Ca represent obligations which are
speculative to a high degree. Such issues are often in default or
have other marked shortcomings.
C: Municipal bonds 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. (-): Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the
condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations.
They possess the ultimate degree of protection as to principal and
interest. In the market, they move with interest rates and, hence,
provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations,
and, in the majority of instances, differ from AAA issues only in a
small degree. Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They
have considerable investment strength but are not entirely free from
adverse effects of changes in economic and trade conditions. Interest
and principal are regarded as safe. They predominantly reflect money
rates in their market behavior, but also, to some extent, economic
conditions.
BBB: 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: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong although not quite as
strong as bonds rated AAA and not significantly vulnerable to
foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however, are more
likely to have an adverse impact on these bonds, and, therefore,
impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher
ratings.
BB: Municipal bonds rated BB are considered speculative. The
obligor's ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are 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: Municipal bonds rated CCC 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: Municipal bonds rated CC are minimally protected. Default in
payment of interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of
interest or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the
lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus or
minus are not used for the AAA and the DDD, DD or D categories.
Municipal Note Ratings
Moody's
Moody's ratings for state, municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction
is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing; factors of the
first importance in long-term borrowing risk are of lesser importance
in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or
both.
MIG 2: Notes are of high quality, with margins of protection ample,
although not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the preceding
grades. Market access for refinancing, in particular, is likely to be
less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but
having protection, and are not distinctly or predominantly
speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and
bonds. After June 29, 1984, for new municipal note issues due in
three years or less, the ratings below will usually be assigned.
Notes maturing beyond three years will most likely receive a bond
rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics will be given a "plus" (+)
designation.
SP-2: Issues carrying this designation have a satisfactory capacity
to pay principal and interest.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to
municipal paper investments permitted to be made by the Fund, are
opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations, all judged
to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the
"A" category are delineated with the numbers 1, 2 and 3 to indicate
the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is very strong. A "plus" (+) designation indicates an even
stronger likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
Fitch's
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes. The short-term rating
places greater emphasis than a long-term rating on the existence of
liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the
strongest degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the
degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated
below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Franklin Federal Tax-Free Income Fund
File Nos. 2-75925
811-3395
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements filed in Part B
(1) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated April 30, 1996 as
filed with the SEC electronically on form type N-30D on July 10,
1996.
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net Assets - April
30, 1996.
(iii)Statement of Assets and Liabilities - April 30, 1996.
(iv) Statement of Operations - for the year ended April 30, 1996.
(v) Statements of Changes in Net Assets - for the years ended
April 30, 1996 and 1995.
(vi) Notes to Financial Statements
b) Exhibits: The following exhibits are incorporated by
reference herein as noted, except exhibits 8(iv),8(v), 11(i),
13(i), 27(i) and 27(ii) which are attached.
(1) copies of the charter as now in effect;
(i) Articles of Incorporation dated January 5, 1981
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Certificate of Amendment to Articles of Incorporation dated
November 1, 1982
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(iii)Certificate of Amendment to Articles of Incorporation dated
June 20, 1983
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(iv) Certificate of Amendment to Articles of Incorporation dated
September 20, 1983
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(v) Certificate of Amendment of Article of Incorporation dated
April 11, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Amendment to By-Laws dated November 17, 1987
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(iii)Amendment to By-Laws dated February 28, 1994
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Form of Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Custodian Agreement between Registrant and Bank of America
NT & AS dated December 1, 1982
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Amendment to Custodian Agreement between Registrant and
Bank of America NT & AS dated April 2, 1990
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(iii) Copy of Custodian Agreements between Registrant and Citibank
Delaware:
1.Citicash Management ACH Customer Agreement
2.Citibank Cash Management Services Master Agreement
3.Short Form Bank Agreement - Deposits and Disbursements of
Funds
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 55 to Registration on
Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(iv) Master Custodian Agreement between Registrant and Bank of
New York dated February 16, 1996
(v) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
(i) Opinion and consent of counsel dated June 27, 1995.
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated August 20, 1996
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
Letter of Understanding dated April 12, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Plan of Distribution effective May 1, 1994
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Form of Class II Distribution Plan pursuant to Rule 12b-1
dated March 30, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited).
(i) Schedule for Computation of Performance Quotations
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney
(i) Power of Attorney dated January 17, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(ii) Certificate of Secretary dated January 17, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act.
(i) Form of Multiple Class Plan
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 30, 1995
(27) Financial Data Schedule Computation
(i) Financial Data Schedule - Class I
(ii) Financial Data Schedule - Class II
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of May 31, 1996, the number of record holders of the two classes of
securities of the Registrant was as follows:
Number of
Title of Class Record Holders
Capital Stock Class I Class II
157,742 1,210
Item 27 Indemnification
Please see Section 6 of the Management Agreement, and Section 16 of Distribution
Agreement, previously filed as an exhibit and incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28 Business and Other Connections of Investment Adviser
The officers and directors of the Registrant's investment advisor also serve as
officers and/or directors for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Group of
Funds. In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B.
Item 29 Principal Underwriters
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of AGE High Income Fund, Inc., Franklin
Custodian Funds, Inc., Franklin Gold Fund, Franklin Equity Fund,
Franklin California Tax-Free Income Fund, Inc., Franklin New York
Tax-Free Income Fund, Inc., Franklin California Tax-Free Trust,
Franklin Investors Securities Trust, Franklin Premier Return Fund,
Franklin Tax-Free Trust, Franklin New York Tax-Free Trust, Franklin
Strategic Mortgage Portfolio, Franklin Strategic Series, Franklin
International Trust, Franklin Tax-Advantaged International Bond Fund,
Franklin Tax-Advantaged U.S. Government Securities Fund, Franklin
Tax-Advantaged High Yield Securities Fund, Franklin Managed Trust,
Franklin Balance Sheet Investment Fund, Franklin Municipal Securities
Trust, Franklin Real Estate Securities Trust, Franklin Money Fund,
Franklin Federal Money Fund, Franklin Tax-Exempt Money Fund,
Institutional Fiduciary Trust, Franklin/Templeton Global Trust,
Franklin/Templeton Global Trust, Franklin Templeton Money Fund Trust,
Franklin/Templeton Japan Fund, Templeton Variable Products Series Fund,
Templeton Real Estate Securities Fund, Templeton Growth Fund, Inc.,
Templeton Funds, Inc., Templeton Smaller Companies Growth Fund, Inc.,
Templeton Income Trust, Templeton Global Opportunities Trust, Templeton
Institutional Funds, Inc., Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Global Investment Trust and
Templeton Developing Markets Trust.
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this
N-1A and Schedule A of Form BD filed by Distributors with the Securities
and Exchange Commission pursuant to the Securities Act of 1934 (SEC File
No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
The Registrant hereby undertakes to comply with the information requirement in
Item 5A of the Form N-1A including the required information in the Fund's annual
report and to furnish each person to whom a prospectus is delivered a copy of
the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 23th day of August, 1996.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
By: /s/Rupert H. Johnson, Jr.*
Rupert H. Johnson, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Rupert H. Johnson, Jr.* Director and
(Rupert H. Johnson, Jr.) Principal Executive Officer
Dated: August 23, 1996
Martin L. Flanagan* Principal Financial Officer
(Martin L. Flanagan) Dated: August 23, 1996
Diomedes Loo-Tam* Principal Accounting Officer
(Diomedes Loo-Tam) Dated: August 23, 1996
Frank H. Abbott, III* Director
(Frank H. Abbott, III) Dated: August 23, 1996
Harris J. Ashton* Director
(Harris J. Ashton) Dated: August 23, 1996
Harmon E. Burns* Director
(Harmon E. Burns) Dated: August 23, 1996
S. Joseph Fortunato* Director
(S. Joseph Fortunato) Dated: August 23, 1996
David W. Garbellano* Director
(David W. Garbellano) Dated: August 23, 1996
Charles B. Johnson* Director
(Charles B. Johnson) Dated: August 23, 1996
Frank W.T. La Haye* Director
(Frank W.T. La Haye) Dated: August 23, 1996
Gordon S. Macklin* Director
(Gordon S. Macklin) Dated: August 23, 1996
*By: /s/Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN FEDERAL TAX-FREE INCOME FUND
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING
SYSTEM
EX-99.B1(i) Articles of Incorporation *
dated January 5, 1981
EX-99.B1(ii) Certificate of Amendment to *
Articles of Incorporation
dated November 1, 1982
EX-99.B1(iii) Certificate of Amendment to *
Articles of Incorporation
dated June 20, 1983
EX-99.B1(iv) Certificate of Amendment to *
Articles of Incorporation
dated September 20, 1983
EX-99.B1(v) Certificate of Amendment to *
Articles of Incorporation
dated April 11, 1995
EX-99.B2(i) By Laws *
EX-99.B2(ii) Amendment to By-Laws dated *
November 17, 1987
EX-99.B2(iii) Amendment by-Laws dated *
February 28, 1994
EX-99.B5(i) Management Agreement between *
Registrant and Franklin
Advisers Inc. dated May 1,
1994
EX-99.B6(i) Amended and Restated *
Distribution Agreement
between registrant and
Franklin/Templeton
Distributors, Inc. dated
April 20, 1993
EX-99.B6(ii) Form of Dealer Agreement *
between Franklin/Templeton
Distributors, Inc. and
securities dealers
EX-99.B8(i) Custodian Agreement between *
Registrant and Bank of
America NT & SA dated,
December 1, 1982
EX-99.B8(ii) Amendment to Custodian *
Agreement between Registrant
and Bank of America NT & SA
dated April 2, 1990
EX-99.B8(iii) Copy of Custodian Agreements *
between Registrant and
Citibank Delaware
EX-99.B8(iv) Master Custodian Agreement Attached
between Registrant and Bank
of New York dated February
16, 1996
EX-99.B8(v) Terminal Link Agreement Attached
between Registrant and Bank
of New York dated February
16, 1996
EX-99.B10(i) Opinion and Consent of *
Counsel dated June 27, 1995
EX-99.B11(i) Consent of Independent Attached
Auditors dated August 20,
1996
EX-99.B13(i) Letter of Understanding Attached
dated April 12, 1995
EX-99.B15(i) Plan of Distribution *
effective May 1, 1994
EX-99.B15(ii) Form of Class II *
Distribution Plan pursuant
to Rule 12b-1 dated March
30, 1995
EX-99.B16(i) Schedule for Computation of *
Performance Quotations
EX-99.B17(i) Power of Attorney dated *
January 17, 1995
EX-99.B17(ii) Certificate of Secretary *
dated January 17, 1995
EX-27.B(i) Financial Data Schedule - Attached
Class I
EX-27.B(ii) Financial Data Schedule - Attached
Class II
*Incorporated by Reference
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: Vice President
By: ______________________________
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing
to act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: ______________________
Title: ______________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________
Harmon E. Burns
Title: Vice President
By: ______________________
Deborah R. Garzek
Title: Vice President & Secretary
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Advantaged International Bond California Limited
Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund Investment
Grade Intermediate Bond
Fund Income Securities
Fund U.S. Government
Securities Fund Zero
Coupon Fund -2000 Zero
Coupon Fund -2005 Zero Coupon
Fund -2010 Adjustable U.S. Government
Fund Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity
Fund Templeton Developing
Markets Equity Fund Templeton
Global Growth Fund Global
Asset Allocation Fund Small
Cap Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 19
to the Registration Statement of Franklin Federal Tax-Free Income Fund on Form
N-1A (File No. 2-75925) of our report dated June 6, 1996 on our audit of the
Financial Statements and Financial Highlights of Franklin Federal Tax-Free
Income Fund, which report is included in the Annual Report to Shareholders for
the year ended April 30, 1996, which is incorporated by reference in the
Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
August 20, 1996
To: All Franklin Templeton Funds Listed on Schedule A
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to invest $100.00 in the Class II shares (the "Shares") of each
of the Funds listed on the attached Schedule A (the "Funds"), on the business
day immediately preceding the effective date for each Fund's Class II shares, at
a purchase price per share equivalent to the net asset value per share of each
Fund's Class I shares on the date of purchase. We will purchase the Shares in a
private offering prior to the effectiveness of the post-effective amendment to
the Form N-1A registration statement under which each Fund's Class II shares are
initially offered, as filed by the Fund under the Securities Act of 1933. The
Shares are being purchased to serve as the seed money for each Fund's Class II
shares prior to the commencement of the public offering of Class II shares.
In connection with such purchase, we understand that we, the purchaser,
intend to acquire the Shares for our own account as the sole beneficial owner
thereof and have no present intention of redeeming or reselling the Shares so
acquired.
We consent to the filing of this Investment Letter as an exhibit to the
form N-1A registration statement of each Fund.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
Date: April 12, 1995
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin Gold Fund Franklin Gold Fund - Class II; 232
Franklin Equity Fund Franklin Equity Fund - Class II; 234
AGE High Income Fund, Inc. AGE High Income Fund - Class II; 205
Franklin Custodian Funds, Inc. Growth Series - Class II; 206
Utilities Series - Class II; 207
Income Series - Class II; 209
U.S. Government Securities
Series - Class II; 210
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income
Income Fund Fund -Class II; 216
Franklin Managed Trust Franklin Rising Dividends
Fund - Class II; 258
Franklin California Tax-Free Trust Franklin California Insured Tax-Free
Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Investors Securities Trust Franklin Global Government Income
Fund - Class II; 235
Franklin Equity Income
Fund - Class II; 239
Franklin Strategic Series Franklin Global Utilities
Fund - Class II; 297
Franklin Real Estate Securities Trust Franklin Real Estate Securities
Fund - Class II; 292
Franklin Tax-Free Franklin Alabama Tax-Free Income
Trust Fund - Class II; 264
Franklin Arizona Tax-Free Income
Fund - Class II; 226
Franklin Colorado Tax-Free Income
Fund - Class II; 227
Franklin Connecticut Tax Free Income
Fund - Class II; 266
Franklin Florida Tax-Free Income
Fund - Class II; 265
Franklin Georgia Tax-Free Income
Fund - Class II; 228
Franklin High Yield Tax-Free Income
Fund - Class II; 230
Franklin Insured Tax-Free Income
Fund - Class II; 221
Franklin Louisiana Tax-Free Income
Fund - Class II; 268
Franklin Maryland Tax-Free Income
Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free
Income Fund - Class II; 218
Franklin Michigan Insured Tax-Free
Income Fund - Class II; 219
Franklin Minnesota Insured Tax-Free
Income Fund - Class II; 220
Franklin Missouri Tax-Free Income
Fund - Class II; 260
Franklin New Jersey Tax-Free Income
Fund - Class II; 271
Franklin North Carolina Tax-Free Income
Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income
Fund - Class II; 222
Franklin Oregon Tax-Free Income
Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income
Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income
Fund - Class II; 223
Franklin Texas Tax-Free Income
Fund - Class II; 262
Franklin Virginia Tax-Free Income
Fund - Class II; 263
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN FEDERAL TAX-FREE INCOME FUND APRIL 30, 1996 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN FEDERAL TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 6,664,081,081
<INVESTMENTS-AT-VALUE> 6,955,402,263
<RECEIVABLES> 148,746,066
<ASSETS-OTHER> 351,176
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,104,499,505
<PAYABLE-FOR-SECURITIES> 40,277,760
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,511,516
<TOTAL-LIABILITIES> 57,789,276
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,819,677,481
<SHARES-COMMON-STOCK> 592,693,405
<SHARES-COMMON-PRIOR> 587,198,388
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (64,288,434)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 291,321,182
<NET-ASSETS> 7,046,710,229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 478,741,417
<OTHER-INCOME> 0
<EXPENSES-NET> (40,144,414)
<NET-INVESTMENT-INCOME> 438,597,003
<REALIZED-GAINS-CURRENT> 72,837,068
<APPREC-INCREASE-CURRENT> (11,834,809)
<NET-CHANGE-FROM-OPS> 499,599,262
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (438,791,296)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 70,993,778
<NUMBER-OF-SHARES-REDEEMED> (79,499,754)
<SHARES-REINVESTED> 14,001,002
<NET-CHANGE-IN-ASSETS> 159,769,483
<ACCUMULATED-NII-PRIOR> 974,408
<ACCUMULATED-GAINS-PRIOR> (137,125,502)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32,164,702
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40,144,414
<AVERAGE-NET-ASSETS> 7,076,599,609
<PER-SHARE-NAV-BEGIN> 11.730
<PER-SHARE-NII> 0.740
<PER-SHARE-GAIN-APPREC> 0.104
<PER-SHARE-DIVIDEND> (0.744)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.830
<EXPENSE-RATIO> 0.570
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN FEDERAL TAX-FREE INCOME FUND APRIL 30, 1996 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN FEDERAL TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 6,664,081,081
<INVESTMENTS-AT-VALUE> 6,955,402,263
<RECEIVABLES> 148,746,066
<ASSETS-OTHER> 351,176
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,104,499,505
<PAYABLE-FOR-SECURITIES> 40,277,760
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,511,516
<TOTAL-LIABILITIES> 57,789,276
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,819,677,481
<SHARES-COMMON-STOCK> 2,884,610
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (64,288,434)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 291,321,182
<NET-ASSETS> 7,046,710,229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 478,741,417
<OTHER-INCOME> 0
<EXPENSES-NET> (40,144,414)
<NET-INVESTMENT-INCOME> 438,597,003
<REALIZED-GAINS-CURRENT> 72,837,068
<APPREC-INCREASE-CURRENT> (11,834,809)
<NET-CHANGE-FROM-OPS> 499,599,262
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (780,115)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,046,996
<NUMBER-OF-SHARES-REDEEMED> (200,657)
<SHARES-REINVESTED> 38,262
<NET-CHANGE-IN-ASSETS> 159,769,483
<ACCUMULATED-NII-PRIOR> 974,408
<ACCUMULATED-GAINS-PRIOR> (137,125,502)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32,164,702
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40,144,414
<AVERAGE-NET-ASSETS> 7,076,599,609
<PER-SHARE-NAV-BEGIN> 11.730
<PER-SHARE-NII> 0.680
<PER-SHARE-GAIN-APPREC> 0.091
<PER-SHARE-DIVIDEND> (0.681)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.820
<EXPENSE-RATIO> 1.150
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
